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Big IT vendors turning to mergers to help take on cloud

More large acquisitions expected; users say they prefer fewer vendors but fear lock-in

June 15, 2010 06:59 AM ET

Computerworld - Hewlett-Packard Co.'s $13.9 billion acquisition of Electronic Data Systems in late-August 2008 was one of the last big tech mergers to close before the latest recession fully arrived.

Less than a month later, HP announced plans to lay off about 25,000 former EDS workers, Lehman Brothers filed for bankruptcy, and the market fell 504 points -- all on the same day, Sept. 15, 2008.

After that miserable and operatic day, the tech industry entered a new, rarely seen era: It temporarily slammed the brakes on mergers and acquisitions.

In the first quarter of 2009, the value of tech industry deals shrank to $3.1 billion, a pittance compared to a normal quarter over the years, according to New York-based consulting firm PricewaterhouseCoopers (PwC).

Now it appears that tech mergers are back, and analysts see them continuing -- at least for the time being. Andy West, a principal in McKinsey & Co.'s merger management practice, predicts "a coming wave" of acquisitions because the number of public companies is relatively high and today's average sale price for public companies is relatively low.

West said that cross-segment acquisitions, such as a storage firm buying a networking company, are most likely. Overall, he noted, the technology market "continues to be ripe for consolidation."

But there are mixed reviews -- and some worries -- among users and analysts about latest merger trend. Users, in particular, see a risk that the mergers will stifle competition and could lead to vendor lock-in. But some also also see the emergence of cloud computing as a potential means of escape from the clutches of the growing-by-acquisition major vendors.

The pace started picking one year to the month after HP disclosed its EDS layoff plans. In back-to-back September 2009 announcements, Dell Inc. agreed to buy Perot Systems Corp. for $3.9 billion and Xerox Corp. agreed to buy Affiliated Computer Services Inc. for $6.4 billion.

And in April of this year, HP closed a deal to buy networking firm 3Com Corp. for $2.7 billion.

Tech merger spending had jumped to $21.3 billion in the 2009 fourth quarter, and the pace continued into 2010, with $19 billion in deals in the first quarter, according to PwC.

There are mixed views on what's driving the latest round of mergers, and what they mean for users.

The big vendors believe that IT managers want to deal with fewer vendors, cut back on the task of integrating multivendor products and focus on solving business problems rather than running data centers. To meet such needs, enterprise vendors are looking to buy firms that their executives believe can help them either add to or expand their menus of service offerings, networking tools, management software and business intelligence tools.

The news may not be all positive for corporate IT executives, as some observers fear that continued merger activity will lead to further market consolidation, cutting back on user choice.

"I think most enterprise software vendors are engaged in a sort of cynical and highly disruptive effort to drive choice out of the ecosystem," said Alan Trefler, CEO of Pegasystems Inc., a Cambridge, Mass.-based business process management company that remains independent 27 years after its founding. "I don't think it's good for the economy, and I don't think it's good for software."

But some observers note that even a consolidated group of enterprise vendors faces a new kind of guerrilla warfare from strong providers of cloud-based applications, like Google Inc. and Amazon.com Inc., as well as from smaller software-as-a-service (SaaS) ventures that are selling niche hosted apps.

As companies turn to applications hosted by others, infrastructure is becoming a commodity, and new services are just a click away -- preferable to having to wait through a lengthy software acquisition and deployment period.



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