IBM and Sun: Innovation or Consolidation?
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As the Internet industry is fearing greater regulation and awaiting consolidation, IBM's acquisition of Sun Microsystems has set pulses racing.
"This is a mature market transaction," Pip Coburn of Coburn Ventures told InternetNews.com. "The reality is that IBM is getting rid of capacity in the market. Anyone looking for a technology silver lining will get sucked into the nice things that IBM and Sun will say. Nobody else will tell you this because they don't want to raise concerns at the Department of Justice (DoJ) after what Oracle went through with PeopleSoft."
Coburn is right to say that the tech industry fears the government. This is especially true now, as it awaits additional regulation from a new administration. "It is extremely likely that we will see more regulation in the financial markets as a result of the current economic crisis," Brian Babineau, an analyst with Enterprise Strategy Group told InternetNews.com earlier this year. "In addition, a Democratic president with a Democratic legislature is likely to increase regulation on other industries, including healthcare. The interesting thing to watch will be what rules are put into place when the government bails out other industries like the automotive sector."
But some in the tech industry also fear the market power of large companies. The news comes just after J.P. Morgan Analyst and Managing Director Imran Khan predicted a wave of acquisitions in 2009. He wrote in a report that the Internet's five largest Web sites -- Amazon, eBay, Google, Priceline and Yahoo -- plus Microsoft and Cisco have, combined, a cash hoard of $76.7 billion and that they will use it to buy other companies instead of investing in R&D. That's a big pile of cash, and adding in IBM's reported $12.7 billion cash on hand at the end of 2008 would increase it to $89.4 billion.
Ed Black, head of the Computer and Communications Industry Association trade group told Reuters that there's a lot of fear about the deal. "There are numerous companies in the industry that are worried about this consolidation, from storage to servers," he said. "Clearly, the withdrawal of a major competitor in those markets means they would have much less choice."
So perhaps this is about acquiring customers in a zero growth market. Larry Ellison, CEO of Oracle, predicted consolidation in 2003 when he said: "The industry is maturing. The valley will never be what it was." The consolidation that JP Morgan's Khan predicted for this year may have only just begun.
On the other hand, maybe it's about beefing up areas where IBM feels weak. For one thing, Sun's investing heavily in the cloud, building new offerings around software, platform and infrastructure as services.
MySQL in particular may be an enticing addition to Big Blue's stable of software. Pankaj Malviya, founder and CEO of cloud provider LongJump, said that the open source database software is the killer app in the deal.
He told InternetNews.com that with the correct interface and back end, IBM could take MySQL to the desktop, building a competitor to Microsoft's Access product. He pointed out that today, MySQL is used by developers alone, but that it has a sufficiently small footprint to be "taken to the masses."
Don't count out IBM's vision for the union. The company has not yet spoken to the press about the acquisition, but the company's leaders know that computing continues to change rapidly.
In his note to shareholders in IBM's annual report, IBM CEO Samuel Palmisano said that as computing has expanded across the internet and to include things nobody sees as computers (such as cars or power lines), companies now have the computing power and the algorithms to analyze mountains of data they have collected.
As a result, the key technologies are no longer in hardware, he wrote, but in software and the network.
"IBM's portfolio today is built around networked, modularized and embedded technologies, such as service oriented architecture (SOA), virtualization, business intelligence and analytics. As a result, we are well positioned to build the kinds of IT infrastructures and solutions that will be of the highest value to our clients."
In the simplest of contexts, in the context of IBM's evolution from hardware provider to deliverer of services, an acquisition in the area may make sense. But then, why Sun?
JP Morgan's Khan wrote that acquirers will evaluate potential targets based on the target's brand strength, its product leadership, the ease of integration, and barriers to entry.
While Sun arguably has some weight in brand strength and product leadership, might other companies be a better fit? Khan wrote that analytics specialist Omniture is a tempting fruit. Although it is difficult to evaluate the relative merits of an acquisition of Omniture and an acquisition of Sun, it's possible that Omniture -- with less than one thirtieth of Sun's employees -- might prove easier to digest.