Banham, Russ, Chief Executive (U.S.)
Big IT companies are buying up small fry to head off competition.
Joe Tucci has a bold thesis about the current wave of technology mergers and acquisitions. The chief executive of data storage giant EMC believes the CEOs running today's large information technology companies -IBM, Microsoft, Cisco Systems and EMC-would rather buy a boutique upstart with disruptive technology than let it grow into a competitor. EMC has done just that in the last two years, eating up small companies like hors d'oeuvres as it extends beyond its bedrock data storage hardware into software and consulting services. Tucci's opinion is sort of a "twice burnt, thrice shy" theory. Over the course of his career beginning in the late-1960s, when the young Brooklynite was fresh out of Manhattan College and earning a paycheck as a systems programmer at RCA, Tucci observed two profound industry shakeups. The first was in the early-1970s, when he was working at Sperry-Univac, which bought RCA in 1971. "The only IT companies at the time were the big mainframe manufacturers like IBM, Sperry Burroughs, NCR and Xerox," Tucci says. "Then, lo and behold, this crop of mini-computer companies like Wang, Data General, Digital Equipment and Hewlett-Packard emerged in the late-1970s and early 1980s, and quickly built great market cap. As they grew and became stars, the rest of us, other than IBM, were rather non-stellar."
A decade later, the same phenomenon again unsettled the market. "In the early 1990s, another new crop came up, companies like Sun, Compaq, Microsoft, KMC and Dell that largely were in the microprocessor space," Tucci explains. "Just as mini-computer companies displaced mainframe companies the personal computer began displacing minicomputers, and these companies quickly built market share and market cap. Each wave of disruption displaced the previous wave."
Never again, Tucci vows. "CEOs like me -John Chambers [of Cisco] and Kevin Rollins [of Dell]-will not let this happen again," he explains. "History has taught us we can't be complacent. We're old enough to have seen the prior acts of this play and know how it will end." Consequently, when a bright little fish pops into view, tech CEOs like Tucci are more than likely to eat it. The possibility that Hewlett-Packard could be split after the firing of Carly Fiorina runs counter to the consolidation trend, but other tech giants are sticking to the acquisition path.
Certainly, EMC, Cisco, Microsoft and IBM have the balance sheets and cash to buy most any upstart with technology that the\· either don't have in the pipeline or have neglected to spend R&D dollars developing. EMC ended the first quarter of the year with $7.4 billion in cash, while networking pioneer Cisco has a cash horde in the $20 billion range. Both companies' bingeing on small fry has contributed a good portion to the more than $198 billion spent on mergers and acquisitions in the technology arena in 2004, an enormous jump from the $48.7 billion reported in 2003. Cisco alone spent a whopping $796.5 million on a dozen deals.
Last year saw more than 1,951 deals in all, up from 1,455 in 2003, according to New York-based technology consultants The 451 Group. This year promises more of the same, with large IT companies eyeing small fry for a variety of reasons: an improving economy giving them more cash; increased demand from enterprise buyers of IT systems, networks and applications; the impact of market saturation and competition; and a broadening in how IT companies define themselves.
These factors in varying degrees are at play at Microsoft, which has invested heavily in acquisitions that bulk up the security of its Windows operating system, MSN network and other products (and offer the company a new product category to boot); IBM, which has virtually forsaken hardware for the business performance transformation services market; and Cisco, seeking to continually fill gaps in its networking technology via acquisitions. …