IT Mergers Resume as Cloud Use Rises

Fearing that increased consolidation could lead to vendor lock-in, some users are looking to the cloud as a more open alternative.

At the onset of a stifling recession in the fall of 2008, the IT industry entered a new, rarely seen era in which merger activity virtually ground to a halt.

That turnaround came abruptly, less than a month after Hewlett-Packard Co.'s $13.9 billion acquisition of Electronic Data Systems Corp. in late August of that year. On Sept. 15, Lehman Brothers Holdings Inc. filed for bankruptcy, the Dow Jones industrial average plummeted 504 points, and HP itself announced plans to cut more than 25,000 jobs.

By the first quarter of 2009, the value of tech deals was $3.1 billion -- far less than usual, according to PricewaterhouseCoopers.

It took almost a year for major IT merger activity to resume. In back-to-back September 2009 announcements, Dell Inc. agreed to buy Perot Systems Corp. for $3.9 billion, and Xerox Corp. agreed to pay $6.4 billion for Affiliated Computer Services Inc. By January, Oracle Corp. had closed a $7.4 billion deal to buy Sun Microsystems Inc., and in April, HP completed its $2.7 billion acquisition of 3Com Corp.

While the renewed activity could prove beneficial to the economy, users fear that significant consolidation could increase vendor lock-in, and that's prompting some to consider shifting to cloud-based systems.

Pros and Cons

"A world where there is not much competition is a problem, certainly for public-sector buying," said Phyllis Koch, director of IT for the city of Boynton Beach, Fla. "I guess I'm torn. It's easier as an IT director not to have lots of different products, because then I become the integrator, as opposed to the company being the integrator for me."

Nonetheless, the Boynton Beach government has made limited cloud moves that Koch said should help the city avoid vendor lock-in and make it easier to implement new technologies.

For instance, Boynton Beach has hired SunGard Data Systems Inc. to run its AS/400-based ERP system, which could ease any move to a new platform such as the x86, she said.

"I'm not concerned as long as healthy competition remains," said Jo-ann Olsovsky, technology services vice president and CIO at BNSF Railway Co. "We do our best to standardize and streamline the products we use, so certainly having fewer vendors can eliminate the complexity in our infrastructure."

She noted that large vendors have been strategically acquiring technology via mergers for years.

Andy West, a principal in McKinsey & Co.'s merger management practice, predicts "a coming wave" of acquisitions, citing the relatively high number of public companies and today's relatively low average sale prices.

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

This story was originally published in Computerworld's print edition. It was adapted from an earlier version that first ran on Computerworld.com.

Copyright © 2010 IDG Communications, Inc.

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