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Article from GigaOm.

“I meet a lot of owners of midmarket IT services companies who almost immediately ask me, “What is my company worth?” Even those who don’t ask want to know often ask.

It’s a fair question, with a complicated answer. I can do a back of the envelope calculation and determine the enterprise value of a company today based on 12 months trailing revenue or perhaps a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). But the real value of a company is based less on its past performance than on its potential worth to a future owner. What the buyer can bring to the party and how well its management believes it can execute the acquisition and business strategy going forward is where a company’s true value resides and where the domain expertise or strategy comes into play.

Case in point: In 1996, IBM bought Tivoli Systems for $743 million, paying about 10 times trailing revenue. Many analysts concluded at the time of the sale that IBM grossly overpaid for the asset. Within a year, IBM was able to leverage Tivoli into almost a billion dollars in revenue. Just like beauty, value is in the eye of the beholder. Tivoli had more value to IBM than Tivoli had to itself at the time. So did IBM pay 10 times revenue or less than one times revenue for Tivoli?

Unfortunately, I don’t have a crystal ball. So I don’t know what potential buyers can do to leverage a company’s value. And a calculation on the back of an envelope almost always fails to satisfy.

Here is something else the owners I talk with really don’t want to hear: Chances are they have taken actions that over time have eroded — or even destroyed — the value of their company without even realizing it. In my last post for GigaOM, I wrote about “5 things that destroy a company’s value.” In this post and in future posts, I’m going to examine these value killers one at a time in greater detail.

Today, my topic is opportunistic acquisitions. And to be clear, my message is for owners of midmarket companies who are interested in making acquisitions designed to increase their own value. In doing so, they hope to become attractive acquisition candidates to buyers in the future.

Acquisitions fail 70 to 90 percent of the time

If you search for the phrase “acquisition failure rates,” you’ll be treated to study after study that peg failure rates at somewhere between 70 percent and 90 percent. Dig a little deeper, and you’ll find articles enumerating the many reasons most acquisitions don’t work.

Nearly all of these reasons can be boiled down to two:

  1. The acquisition was a bad match between what the seller had and what the buyer could do to create value. The bad match often occurs because the buyer was fooled, misled, or overlooked key points of the deal, or the buyer simply suffered from hubris.
  2.  The buyer did a poor job of integrating the acquisition and executing on the business strategy designed for its new asset.

In both situations, acquisitions fail because the buyer doesn’t really know what or why it’s buying — let alone what to do with the acquisition.

Think about when HP bought Compaq or when Time Warner bought AOL.

Of course there are companies that are successful with acquisitions. Cisco has acquired 150 companies since its first acquisition in 1993. In fact, acquisitions are a core competency of Cisco — few companies are better at it.

Cisco’s purchases are fueled by the desire to speed up the rate at which the company can offer new technologies in a market that is hyper-competitive and evolving rapidly.

Not all of Cisco’s acquisitions are hits. Remember the Flip video camera that Cisco shut down in 2011? But many were successful, especially in the early days. At the peak of its acquisition activity in 2001, Cisco’s purchases were widely credited with laying the foundation for about half of its business at the time.

The secret to Cisco’s fruitful acquisitions is its ability to successfully onboard companies. Cisco employs a full-time staff solely focused on integrating new companies into the fold — instead of haphazardly assembling part-time transition teams whose members are all busy with their regular jobs.

In terms of strategy and execution, Oracle is even better at acquisitions. The company has spent billions on about 90 companies since its acquisition of PeopleSoft closed in 2005. Oracle’s chief skills are identifying companies that fit well into its longterm business strategy at the front end of the process, and its ability to integrate and act on these strategies at the back end. In 2011, readers of The Deal Magazine recognized Oracle’s track record with an award for most admired corporate dealmaker in information technology for deals completed from 2008 to 2010.

Until late in 2011, Oracle’s acquisition drive was to create the broadest portfolio of traditional enterprise software applications in the industry. With the company’s $1.5 billion acquisition of SaaS CRM applications provider RightNow Technologies (announced in September 2011 and completed in January 2012), Oracle now hopes to work its magic in the SaaS market. Oracle paid more than seven times trailing revenue for RightNow. I bet that in the next year or two, Oracle will make that multiple look like a bargain — just like when IBM bought Tivoli.

Still, Cisco, Oracle and other exceptions to the rule underscore the difficulty of making acquisitions work. It’s even harder when an acquisition happens because a buyer is presented with an unexpected “opportunity” and management decides it’s just “too good to pass up.” These so-called “opportunistic” acquisitions often lead to disappointment or disaster.

The reasons for failure are obvious. Acquirers lured by such a passive approach often have no clearly defined goals, have not thought through the attributes of ideal acquisition candidates, have done little or no pre-acquisition planning, and suffer from a lack of choice.

It reminds me of people who go to Las Vegas for the weekend and end up married. Getting married in Nevada is quick, easy and relatively inexpensive. All you need is a marriage license — no blood tests and no waiting period. And there is a wedding chapel on every corner.

Of course, when you wake up the next morning, there may be hell to pay.

I know. I’ve been there. Not in Las Vegas on the morning after, but at an organization that for many years only bought companies that showed up on its doorstep. We had no strategy and no process for integrating acquisitions into the mothership. I’m convinced that if the owner of the neighborhood car wash had offered us a “good” deal, we’d have taken it.

So here’s my advice for owners of companies seeking to enhance their value through opportunistic acquisitions. Acquisitions can do a lot of good. They can add to your growth and earnings, speed your entry into new markets, allow you to acquire human capital or intellectual property more quickly, and lower your costs through economies of scale. All of these things have the potential to increase the value of your company to a prospective buyer.

But just like marriage, acquisitions should never be decided on a whim. And you should never buy a company just because it’s for sale. Frankly, companies that are not for sale offer juicier profits and are likely a better strategic fit. Better to take some of that money and go have fun with it in Las Vegas.

And if you go there, don’t get married.”

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Article from GigaOm.

For many years, Oracle and HP co-existed quite happily. They collaborated on the first Exadata in 2008, for example. Former HP CEOs Carly Fiorina, then Mark Hurd, keynoted at Oracle OpenWorld. HP appeared to have supplanted Sun Microsystems as Oracle’s hardware BFF for a while. Everything was copacetic.

Now the two companies are arch-rivals and are engaged in an increasingly bitter, seemingly personal battle, the latest skirmish of which saw a California Superior Court judge throw out a fraud claim Oracle lodged against HP. He also opened up court documents that don’t show either company in a particularly good light.

How did it all go so bad?

First, Oracle bought Sun for $7.4 billion in a deal completed in January 2010. That meant Oracle, for the first time was in the hardware business and its servers would compete with HP servers. That sealed the fate of the relationship going forward.

The public bad feeling erupted in August 2010 when HP canned Hurd as CEO, then hired former Oracle president Ray Lane (pictured above right) as chairman and Leo Apotheker, former CEO of SAP, as CEO. SAP is a huge rival to Oracle in enterprise apps and Lane left Oracle after a bumping heads with Oracle chairman Larry Ellison (pictured at right.) Things have just deteriorated ever since.

Here are some highlights (low lights) of the slap fight.

In a letter to the New York Times in August 2010, Ellison said HP’s firing of Hurd:

The H.P. board just made the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago … That decision nearly destroyed Apple and would have if Steve hadn’t come back and saved them.”

HP’s server and storage chief Dave Donatelli blasted Oracle for discontinuing Itanium development at the HP partner conference in March 2010. Donatelli asked the couple thousand HP resellers in attendance to lobby Oracle to reverse it’s Itanium decision.
This is a shameless attempt to force customers to spend a lot of money to move to a platform over time that gives customers no benefits  … Oracle made this decision to slow Sun SPARC market losses.

Ray Lane calls out Hurd in his letter to The New York Times in October, 2010.

The bottom line is: Mr. Hurd violated the trust of the Board by repeatedly lying to them in the course of an investigation into his conduct. He violated numerous elements of HP’s Standards of Business Conduct and he demonstrated a serious lack of integrity and judgment
ut now in California District Court is just the latest in a  deterioration of a previously beneficial relationship between the two tech giants.

After Apotheker announced HP plans to buy Autonomy — another enterprise software company for $11.7 billion in August, Oracle couldn’t contain itself.

In a statement on September 28, 2011, Oracle said Autonomy had shopped itself to Oracle first and Oracle turned it down. When Autonomy CEO Mike Lynch denied that, Oracle said: “Either Mr. Lynch has a very poor memory or he’s lying.”

When there was further denial, Oracle put out another statement entitled “Another whopper from Autonomy CEO Mike Lynch” and helpfully published the PowerPoint slides it said he and banker Frank Quattrone brought to the meeting.  The presentation is here and here.

According to the statement:

Ably assisting Mike Lynch’s attempt to sell Autonomy to Oracle was Silicon Valley’s most famous shopper/seller of companies, the legendary investment banker Frank Quattrone.  After the sales pitch was over, Oracle refused to make an offer because Autonomy’s current market value of $6 billion was way too high.

The next chapter in this saga may be a trial on HP’s remaining claims against Oracle which should kick off in April, but stay tuned: anything can happen and usually does.”

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Article from SFGate.

“Hewlett-Packard Chief Executive Officer Meg Whitman announced Thursday that the company has decided not to spin or sell off its PC division, another repudiation of a controversial plan proposed in August by her ousted predecessor, Léo Apotheker.

Whitman said an internal review showed it would be more costly to sell or spin off the unit, called the Personal Services Group, than to keep it within the Palo Alto company.

“HP objectively evaluated the strategic, financial and operational impact of spinning off PSG,” Whitman said in a statement. “It’s clear after our analysis that keeping PSG within HP is right for customers and partners, right for shareholders, and right for employees. HP is committed to PSG, and together we are stronger.”

The plan to spin off or sell the division was one of the major factors that led HP’s board of directors to dump Apotheker in September and hire Whitman. The PC unit is HP’s least profitable, but accounts for about one-third of the company’s revenue.

In a news release issued minutes after the close of trading on Wall Street Thursday, HP noted the unit generated $40.7 billion in revenue for fiscal year 2010.

HP said the internal review “revealed the depth of the integration that has occurred across key operations such as supply chain, IT and procurement. It also detailed the significant extent to which PSG contributes to HP’s solutions portfolio and overall brand value. Finally, it also showed that the cost to recreate these in a stand alone company outweighed any benefits of separation.”

When she took the helm, Whitman said her appointment wasn’t a signal that HP was shifting its strategy away from the course set by Apotheker.

But at an economic conference earlier this month in San Francisco, Whitman was asked whether HP would continue Apotheker’s software expansion strategy following the company’s $10.3 billion purchase of British software maker Autonomy Corp.

“It’s certainly the end of big acquisitions,” Whitman said.

Stock in HP closed at $26.99 per share, up $1.24, on the New York Stock Exchange.”

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Article from DOW JONES NEWSWIRES

Hewlett-Packard Co. (HPQ) is following the lead of rival International Business Machine Corp. (IBM) in possibly shedding its personal-computer business and focusing more on higher-margin operations like analytic software–but the transition is not likely to be easy.
H-P is significantly farther behind in the software market than IBM was when the Armonk, N.Y., company sold its computer business to Lenovo Group Ltd. (LNVGY, 0992.HK) in 2005. And since then, the value of PC assets has declined, meaning the world’s biggest computer maker may not get the cash boost needed to catch up with the software leaders ahead of it.

For IBM, its move last decade has worked out well. While other tech companies have seen volatility from their consumer exposure, IBM has posted consistent results, even during the depths of the recession. The company last month boosted it outlook for the year, helping send shares to an all-time high.

“IBM is the best-positioned of the big tech companies by far,” Gleacher analyst Brian Marshall said. “The majority of revenue comes from high-margin, annuity-type revenue streams such as software and services. … IBM has a phenomenal business model, and H-P is trying to follow in those footsteps.”

H-P is taking a big step Thursday by agreeing to buy U.K. data-analytics firm Autonomy Corp. (AUTNY AU.LN) for more than $10 billion. Analytics software, a fast-growing area, helps companies sift through massive amounts of information to solve business problems or make predictions.

“It’s the beginning of the transformation of H-P today,” Chief Executive Leo Apotheker said.

IBM has focused on analytic software for a while. Among the company’s dozens of acquisitions over the past five years, IBM has spent $14 billion on 24 analytics-related purchases. IBM expects the market for analytics to be over $200 billion by 2015, of which it sees getting about $16 billion.

Transitioning out of one big business and into another takes time and money. Since 2001, IBM has bought more than 127 companies for a combined total of $33 billion. Those earlier acquisitions helped to give IBM a strong software business–second only to Microsoft Corp. (MSFT)–when it sold the PC operations.

As a result, in IBM’s recently reported quarter, the company had software revenue of $6.2 billion, 23% of its total revenue. In comparison, H-P Thursday reported quarterly software revenue of $780 million, 2.5% of its total revenue.

IBM decided to get out of the PC market because the company viewed it as a commoditized industry where companies can only compete on price. Chief Executive Sam Palmisano said last year during an interview with the Wall Street Journal that he wouldn’t be able to give away IBM’s PC business today.

“We got a reasonable valuation for the company, and today I’d have to pay them to take it,” he said. “And the reason being is that the technology shifted, and we wanted to get out before it was obvious to everyone.”

During the same interview, he also criticized H-P, saying he’s not worried about a company that no longer invests in innovation. About 6% of IBM’s 2010 revenue went to research and development, compared to only about 2% at H-P.

H-P has said in recent months that it’s increasing its research spending.

Meanwhile, Mark Dean–one of the creators of the first IBM PC–said in a blog post last week that the PC age is essentially over, going the way of the typewriter and incandescent lightbulb.

“While many in the tech industry questioned IBM’s decision to exit the business at the time, it’s now clear that our company was in the vanguard of the post-PC era,” said Dean, who currently serves as chief technology officer of IBM Middle East and Africa.

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Article from SFGate.

“It’s been a big couple of weeks in mobile. Verizon Wireless finally got the iPhone. Hewlett-Packard unveiled the first fruits of its Palm purchase last year. Nokia, the world’s biggest maker of handsets, abandoned its once-dominant Symbian mobile software system and demoted itself to a kind of glorified contract manufacturer of Microsoft-powered devices.

The struggle for mobile dominance has entered a new phase. Why would Nokia throw out Symbian, with its 37 percent market share, in favor of software with less than one-seventh of that? Because recently hired Chief Executive Officer Stephen Elop is convinced that Microsoft has better odds of going up against the four other mobile powers – Apple, Google, Research In Motion, and HP – and making its new Windows Phone 7 software a center of gravity for the world’s programmers, manufacturers, and consumers.

“The game has changed from a battle of devices to a war of ecosystems,” Elop told investors at a recent London news conference.

Actually, it’s the same game that created the most valuable franchises in tech history, from IBM to Microsoft to Facebook. All successfully established themselves as “platforms,” in which countless entrepreneurs and programmers developed products and applications that gave value to customers and profitability to shareholders – sucking oxygen away from rivals all the while.

Platform leaders

In the 1960s, IBM trounced Sperry and other mainframe manufacturers by creating a soup-to-nuts stack of hardware, software and services.

In PCs, Microsoft erased Apple’s early lead by signing up hardwaremakers to create cheap machines, and software companies to develop Windows versions of everything from word processors to Tetris.

Facebook vanquished social networks such as MySpace by repositioning itself as a platform – a decision that led to the creation of gamemaker Zynga and other app companies that keep Facebook’s 500 million users hanging around.

What’s different this time is scale.

“Mobile is the biggest platform war ever,” said Bill Whyman, an analyst with International Strategy & Investment. More smart phones were sold than PCs in the fourth quarter, and sales should reach $120 billion this year. That doesn’t count billions more in mobile services, ads, and e-commerce.

This war will probably last for some time, too. Unlike with PCs, where the unquestioned victor – Microsoft – quickly emerged and enjoyed years of near monopoly, no one has a divine right to dominance in mobile. Microsoft crushed its competition by forcing people to make a choice. There were far more software applications for PCs, and most didn’t work on Macs. The more Microsoft-powered machines out there, the more people wrote software for them, the more people bought them, and the bigger the whole system became. Economists have a name for that phenomenon: “network effects.”

Appealing products

All cell phones can talk to each other and handle the same websites and e-mail systems, so winning means making products that function more effectively and appealingly. That sums up Apple’s success.

Steve Jobs figured out long ago that when people spend their own money, they’ll pay for something a lot nicer than the unsexy gear the cheapskates in corporate procurement choose. While others competed on price, Apple focused on making its products reliable and easy to use. Once customers buy an iPhone and start investing in iTunes songs and apps, they tend to stick with the system and keep buying – even though there’s no proprietary lock on the proverbial door.

Apple’s huge sales volume makes carriers and suppliers more likely to agree to its terms. The software that powers everything Apple makes – all variations of the Mac operating system OS X – is as intuitive to developers as Angry Birds is to app shoppers.

The result is economic leverage of staggering power. To create a blockbuster, Apple doesn’t need to spend billions on a start-from-scratch moon-shot of a development project. It just needs to tweak a previous hit.

Take the iPad, which is in many ways a large iPod touch. Apple won’t say how much the iPad cost to develop. Consider these numbers, though: In the year that ended Sept. 30, during which Apple introduced the iPad and the iPhone 4, the company spent $1.8 billion on research and development. Over the same period, Apple’s revenue increased by $22.3 billion. Nokia spent three times as much as Apple on R&D – $5.86 billion – and increased revenue by just $1.5 billion. No wonder that Apple, whose share of total global mobile-phone sales is only 4.2 percent, gets more than half the profit generated by the industry, according to research firm Asymco.

Fast-growing Android

Even Google, Apple’s mightiest rival, got only a $5 billion increase in sales on its $3.4 billion R&D budget. It does have plenty to show for its efforts, though: Its Android platform is growing at a blistering pace. In the fourth quarter, according to research firm Canalys, twice as many Android devices shipped as iPhones.

“Google is being far more aggressive in building its platform than Microsoft ever was,” says Bill Gurley, a partner at Benchmark Capital.

Barring big surprises, the other contenders – RIM, HP, and Microsoft – are in for a slog: too dependent on mobile devices to give up, yet lacking the tools to make much progress. All lost market share in 2010 and have far fewer apps available for their devices.”

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Article from SFGate.

“Tech jobs are coming back after hitting bottom early this year, according to economy tracker Moody’s Analytics. The U.S. economy has added 47,000 technology jobs so far this year amid resurgent demand for tech products in Asia and Latin America.

That represents 15 percent growth in tech jobs, compared with an 11 percent jobs growth in the economy overall since the beginning of the year, according to Moody’s. Since a peak at the end of 2007, the tech industry had lost 307,000 jobs nationally in the economic downturn.

“It seems like this industry is embarking on a new growth spurt,” says Sophia Koropeckyj, a managing director for Moody’s Analytics. “Tech jobs seem to be accelerating.”

Asia and Latin America’s demand for tech products has resulted in new hiring and is one contributor to the recovery, Koropeckyj says. After slumping in the first half of 2009, global PC shipments – bread and butter of U.S. companies Hewlett-Packard, Dell and Apple – should rise 14.3 percent this year, to 352 million units, according to consultant Gartner.

Billions in government stimulus funds have spurred recent purchases by agencies and businesses, such as those building out broadband networks. Corporate and government information technology spending should rise 8.1 percent this year, to $758 billion, according to consultant Forrester Research. Already, networking gear maker Cisco Systems saw sales for its fiscal first quarter ended Oct. 30 rise 19 percent from a year earlier, to $10.75 billion.

“The first wave of growth is going through,” says Andrew Bartels, a vice-president at Forrester.

But the recovery may be uneven: During Cisco’s quarterly earnings call in November, Chief Executive Officer John Chambers mentioned several challenges the company faces, such as slower-than-expected pickup in orders from government agencies in the United States and Japan.

Recovery among Detroit’s automakers, helped by a government bailout, is driving a resurrection of related tech-sector jobs. Last year, Detroit experienced a 15 percent drop in high-tech jobs from a year earlier, according to a new study from technology industry association TechAmerica Foundation, which studied jobs and wages data for the 60 U.S. cities with the highest proportions of tech jobs.

Detroit’s was the worst drop in high-tech jobs among any of the 60 cities last year. But in a Dec. 1 blog, carmaker Chrysler announced it will hire 1,000 more engineers and other high-tech workers by the end of the first quarter of 2011. The company has hired 5,000 workers overall since emerging from bankruptcy in June 2009. In November, rival General Motors said it will hire 1,000 engineers and researchers in Michigan in the coming months to help expand its lineup of electric cars, whose sales are expected to climb.

In some technology industries, salaries are starting to inch back up again.

Information, media, and telecommunications professionals have seen their wages rally slightly this year, according to survey data from PayScale, which tracks global compensation. In 2009, high-tech salaries nationwide slipped 0.8 percent, which was less than the decline in the private sector overall, where the average salary dropped 1.4 percent, according to the TechAmerica report.

“The gap has widened. It’s significant,” says Josh James, vice president of research and industry analysis at TechAmerica. “Especially in hard times, companies are trying to cut costs, and one way to do that is to implement technology solutions.””

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Article from SFGate.

“Oracle Corp., the world’s second-largest softwaremaker, agreed to buy Art Technology Group Inc. for about $1 billion in cash to add e-commerce programs.

Art Technology investors will receive $6 per share, Oracle said in a statement Tuesday. That’s 46 percent more than the company’s closing price Monday.

Oracle, building on a run of more than 65 acquisitions during the past five years, is looking to purchase makers of industry-specific software, Chief Executive Officer Larry Ellison said in September. Art Technology of Cambridge, Mass., provides companies such as retailers with technology for online merchandising, marketing, automated recommendations and live-help services.

Oracle, which trails Microsoft Corp. in software sales, had $23.6 billion in cash and short-term investments as of Aug. 31, the end of its fiscal first quarter. Art Technology is the ninth acquisition Oracle has announced in 2010.

The deal price is 33 times earnings before interest, tax, depreciation and amortization, compared with the median multiple of 17 times EBITDA for similar deals in the past six years, according to Bloomberg data.

Art filed for its initial public offering in May 1999, as investors backed startups in the growing market of Internet advertising. Its shares hit a high of $122 in July 2000. Less than a year later, the dot-com bubble burst and the company faced four consecutive years of sales declines through 2004. Its shares plummeted 95 percent in that time period.

Oracle, along with competitors Hewlett-Packard Co. and IBM Corp., are acquiring companies as they bolster their offerings of corporate software and technology within data centers. HP has announced eight deals so far this year, and IBM has announced 15.

This year, Oracle completed its purchase of Sun Microsystems Inc. for $7.4 billion, positioning itself to compete against HP and IBM in the server-computer market. Ellison said in September he’s also on the hunt to purchase semiconductor companies, aiming to follow the approach of Apple Inc. by owning more of the intellectual property behind computer chips.”

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