M&A: 6 Targets That Could Change Technology Business

It started with the Oracle-Sun merger, at a time when a few had started
talking about a recovery. As soon as it was clearer that the recovery is indeed
on, we saw a spate of mergers that took the industry by surprise.

If Dells acquisition of Perot was a signal that services are now not an
untouchable for product companies, Xeroxs acquisition of one of Americas
largest pure services firms put an authoritative stamp on that belief. The way
integration is happening in Dell further strengthens this belief. The entire
Dell services have been reorganized under a separate services division headed by
Perot CEO.

Another such game changing acquisitionthough much smallerwas Adobes buyout
of Omniture. Adobe has been the right brain of the Internet all these years.
Omniture has been the left brain. With their coming together, the phrase
creative intelligence has taken a new meaning.

One of the oldest pure play software companies in the world, CA plays in
what it calls enterprise IT management., which it divides into three
categories: govern, manage, and secure. While it is a significant player in
all areas, where it has a real edge is in making it possible to smoothly
manage heterogeneous, traditionally non IT components through an IT network.
CA has gone through several controversies in its history including bribery
accusations against its founder chairman and jail term for one of its former
CEOs, accused of fraudulent activities. It is a new CA, however, with the
same established products but a different management and vision. With the
world becoming more and more networked, CAs products could be more useful
in managing our lives. DQ Take (Why it is Hot) We believe the road ahead for
a software like CAs core software, without the services component (that is
integration, operations and human services) is limited. For any company that
has both enterprise IT management software and significant service offering,
CA products could add significant value. Of course, there are two companies
which stand above the rest when it comes to thatthe #1 IT company HP and
the #2 IBM. Both have management software, significant IT projects that come
to them for integration, outsourced managed services and to top, human
services as BPO that could supplement these. Both, we feel, will get
significant value, by adding some CA products which they can leverage not
only to significantly enhance their services offerings but could just erase
the dividing line that exits between IT and non-IT technology
infrastructure, across verticals such as banking, utilities, infrastructure,
oil & refineries, and manufacturing.

Of course, there have been many more deals. But we believe these four
dealsSun-Oracle, Dell-Perot, Xerox-ACS, and Adobe-Omnitureare really game
changing. We define a game changing deal as one that redefines industry
boundaries, or disruptively changes the dynamics of a market segment.

And we believe these four deals are just the beginning. In the next few
months, a significant number of such mergers would happen that will either
create new opportunities or will significantly accelerate a trend that has
already been visible. All of them would defy conventional logic.

This Taiwanese company is to the mobile devices market what TCS and Infosys
were once to the IT services market. It has caused a disruption in the
market in more ways than one. The former contract developer and manufacturer
has not just challenged the dominance of RIM among the business users, it
has single handedly proved that the business phones need not be heavy more
of PDAs-less of phones machines and can be affordable. Also, whether with
Compaqs iPAQ which it contract-produced earlier or its sleek new HTC touch
phones that it has introduced in the market recently, HTC is single-handedly
responsible for making Windows Mobile a serious mobile OS. No wonder, when
Google decided to make Android commercial, it chose HTC.

DQ Take (Why
it is Hot)

The type of devices that HTC makes is the future of both PCs and phones.
HTC has been the company responsible for making it happen, in a significant
way, by making an OS from the former world successful in the latter.
However, the fact that it is not listed in the US or Europe, does not bring
it to media limelight. At a market cap of just about $9 bn, that is way
below that of RIM or the ailing Motorola, it is a good buy for anyone who
wants to challenge the industry status quothe dividing line between phones
and PCs. With GPRS and 3G, the demand for such devices is only going to
accelerate further. If it could help Acer getting seriously into the mobile
handheld market, it could help Nokia or RIM to break the price barrier
significantly or a Samsung or a Sony Ericsson establish their credential as
serious business phone companies. Why, it could help Google become a device
maker if it so wishes.

We present here six potential targets which we have argued will make sense
for some large companies to buy out. They are CA, HTC, Juniper Networks, Polycom,
Sapient, and Symantec.

We do not claim we have information from those companies that they are
looking at such deals. The idea is not to come out with a scoop or even an
imagination to proclaim we-told-you-so later. Many of the deals may never come
through. On the other hand, many other deals may get announced. Some havelike
Brocade, Electronic Arts, etcare making rounds for a very long time. Why, one
has just been announced as we are writing this: HPs acquisition of 3Com. In our
pick, we have Juniper. Not that we believed Juniper is a more likely target than
3Com. But we believe Juniper, if it is taken over by HP, would change the
networking industry forever. That would be game changing. A 3Com acquisition is
easier to implement, a good first step and will grow HPs networking business
considerably. It will make HP a little better than #2. But it will not change
the networking products market in any significant manner.

When talking of an alternative to Cisco was sort of blasphemy, an
ex-scientist from Xeroxs famous PARC lab, Pradeep Sindhu, convinced top VC
Kleiner, Perkins, Caufield & Byers to invest in a rival productand that to
take on Cisco at the top end. Right from its first product, the legendary
M40 router, Juniper has maintained that leadership in the core router area,
even though there have been multiple rounds of two-way contests. Even as
most networking products companies fell by the wayside, Juniper maintains
its premier positioning even today, with its T1600 arguably being the
densest core routers commercially available. Of course, it has since got
into the edge and the enterprise space for growth.

Juniper may still be
beating Cisco when it comes to speed in core routing, but Cisco has
transformed itself from a networking product company to a communication
company with offerings of networking, applications, services and other
communication hardware and software. Juniper still remains a networking
company.

DQ Take (Why it is Hot)

Well, let us be straight and clear. It is a great company. But its
future as a pure play networking company is what is in question. And it
makes a great buy for a one gentleman called Mark Hurd, the CEO of
Hewlett-Packard. Hurd, who has shown the inclination and even eagerness to
take on Ciscoincidentally after being a reseller of and playing second
fiddle to itwould find Juniper a great fit, if he wants to beat Cisco at
its own game. He has already moved one of his top executives (and a leading
artist in all major M&A in the last five years including EDS) Marius HaaS to
head HP ProCurve, its networking business, we believe, not just to grow a $1
bn organically by a few percentage points. The 3Com acquisition is a good
first step.

Which Other Companies We Considered?

Informaticathat is in the news for this reasonwas omitted because we did not
think it will change any market significantly if it is acquired by any large
company. We considered Palm, which did not make it to the final list because it
is fading and even in combination with any significant player will create much
better value. Red Hat was another company that we believe would get acquired
(like we did about 3Com) but it is too small to make an impact to say an IBM.
That is the same reason we eliminated TIBCO, and Websense. McAfee, another
company that was in our shortlist, may be much bigger and may be more likely to
get acquired, but it will not create any significant difference. On the other
hand, Sapient, half its size, we believe, will change the rules of business if
it is acquired by a product company. We have acknowledged it will be just
another acquisition if it is taken over by another large services company.

In its less than two-decades old history, Sapient has transformed itself
many times. Starting as a technology services firm, it transformed itself to
an Internet professional services company during the dotcom heydays. While
most of its competitors of those era just vanished along with the dotcoms
that they were thriving on, Sapient stayed on to become one of the leading
interactive agencies when businesses rediscovered the value of the Internet.
It went through accusations of irregularities in the last 2-3 years but has
bounced back since then. One of the first mid-range services companies to
tap the India potential way back in 1999, Sapient today has a mix of
Interactive business and technology businesses. While its leadership in
interactive services is beyond dispute, its me-too positioning in technology
services means few companies willing to value that part of business.

DQ
Take (Why it is Hot)

Sapient is among the top three interactive agencies in the world and is
the only one with a strong technology ethos that would integrate easily with
a large technology company. Going by the increasing trend of product
companies getting into services, it makes excellent sense for a company like
Microsoft or Adobe to lap up Sapient to offer a more end-to-end solution to
their customers. It makes some sense for Google too, with its increasing B2B
focus. In any of these cases, it would make it a game-changing deal.

The other possibilityeasier to imagineis the acquisition by a large
services firm. But we believe the creative agency culture of Sapient is far
more difficult to integrate with the metrics/headcount culture of large
services firms. And the technology services part of the business is not
something that any large company will find any specific value inbe it
skill, size or client base. Also, if it happens, it will not be a game
changer.

The only company where we struggled a lot before finally taking it out from
the list was RIM, the maker of Blackberry devices. At that kind of valuation, we
do not believe it makes sense for any company to acquire it for anything other
than scale and adding customer base. That is not a game changing proposition.

And of course, there are many more: CSC, Yahoo!, Salesforce. But again, they
do not meet our strict game-changing definitions, in combination with any one.

The largest security vendor is also the seventh largest software maker in
the world. It has dominance not only in the enterprise security segment and
storage software (acquisition of erstwhile Veritas business) but also is the
#1 vendor in the PC security/anti-virus market, now looking to play in the
emerging smartphone market. Symantec has been extremely successful so far,
but going forward, has to build a more end-to-end offering, including in
areas like identity management as opposed to traditional security vendor
approach of authentication, or merge with a large software company. Also,
increasingly, the PC software could get bundledand even integratedwith the
OS.

DQ Take (Why it is Hot)

In 2009, most of the IT areas saw investments going down. Not security.
Security is no more an afterthought for large organizations. It is essential
IT for smallest of business and even home users. In a fragmented market,
Symantec stands tall as the dominant leader. For enterprise software
companies, it makes immense sense to build in security to the software, even
for Microsoft, it is sound logic to integrate PC security. All these
companies, we believe, will gain significantly by acquiring Symantec. Cisco,
the other force in security, may not find it easy to integrate the business,
especially the PC part to its business, tough.

So who are the potential acquirers? They are the usual names: HP, IBM,
Microsoft, Google. HP figures in the potential acquirers list more than any
company. Well, it is the worlds #1 IT company. Also, CEO Mark Hurd has shown
inclination to grow it by inorganic means and even challenge established
leaders.

So far, the private equity investors have been conspicuous by their absence.
Maybe, they will join the race too. They, of course, do change the game some
times, but not with a splash.

While these six do not have a common trend, we believe services will lure
quite a few product companies. There, India will play a much more significant
role.

This list is presented so that our readers can create their ownagree with
some of these, disagree with some others. We respect the intelligence of our
readers.

Shyamanuja Das

shyamanujad@cybermedia.co.in