Thursday, March 19, 2009

IBM buying Sun - good or bad for business?

There is an interesting article in the WSJ about the potential acquisition of Sun Microsystems by IBM. There are a few issues that the WSJ did not address that are direct affects of this transaction to the venture capital and IT oriented private equity markets.

1) One less acquirer -

There is only a handful of large tech oriented companies in the world that are active acquirers of tech businesses and pure innovation. Sun Microsystems is one of them. They did more than 20 transactions in the 1990s and more than 20 in this decade. Sun has not been such an active acquirer of Israeli tech (like IBM), but they acquired Aduva and they have a nice sized R&D center in Herzeliya. The VC / PE model is based on M&A exits to provide financial returns. More than 80% of exits are M&A. The M&A market will shrink after this acquisition. This handful of companies in the world understand that in order to sustain market leadership and in order to grow shareholder value is through organic AND inorganic / strategic growth.

Parenthetically, most large Israeli companies do not realize that acquisitions are necessary for value creation. Case in point, lets quickly explore arguably the star of the Israeli tech scent - Check Point. They are the founder of firewalls. Great internal innovation. Selling software at close to 100% gross margins and 40%+ net margins consistently. Sitting on a huge bag of cash. And only making small or distressed acquisitions - not strategic acquisitions. Growth is hurting and shareholder value is relatively low, compared to other active acquirers in the security software space - companies with less cash and worse operating performance (see MFE, SYMC, etc). But value is forward thinking. Forward thinking = longer term and strategic thinking, not just tactical. Therefore, acqusitions are key for large tech companies to grow.
2) Sun has more than 30,000 employees
"Consolidation" and "efficiencies" are code words for firing and shutting down units. This has good and bad implications. Mostly good for our industry, since it forces good people to enter the work force - where many will enter in start up world. This generates the recycling model, allowing for sound investment opportunities. This is true for Israel as well, where IBM has been and will be an active acquirer of Israeli tech. They have subsequently created R&D divisions across the country - Jerusalem (iPhrase, Unicorn, etc), Haifa (historical applied research center), and Tel Aviv (XIV, Diligent, etc).

3) BPM
Lastly, a bit more closer to home, within some period of time after the acquisition, there will be one less BPM player competing in the market (disclosure: Goldrock Capital is an investor in PNMsoft). Sun acquired SeeBeyond and is now called Sun Java Composite Application Platform Suite. And IBM made BPM acquisitions with FileNet and ILOG. It will also take some integration time for IBM and Sun, and may set them back in the market a bit. We shall see!

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