November 15, 2010

Is M&A replacing the Strategic Alliance?

By Brady Flaherty, Executive Vice President of Business Development, MergerTech Advisors

It is very interesting to see what has happened in the IT Sector in the last year or so.  Even though the fundamentals stay the same like technology becoming more sophisticated and cheaper over time, and software becoming more robust and useful, the notion of collaboration and using several technology partners for a solution may be a thing of the past.  All of the technology leaders have “Strategic Alliances” with each other.  Software and hardware companies partner with each other.  Service companies need machines to fix, and consultants need applications to customize and support.

The simple days of obvious competition of 3Com underbidding Cisco, IBM taking on HP and Dell, and Oracle competing with SAP are gone.  Everyone is competing against everyone now.  Historically, companies like IBM, HP, and Dell all had huge investments and sales efforts to partner with the other large enterprises like Cisco, Oracle, and SAP.  Now, Cisco and Oracle are asking their install base for server business and HP is asking their customers for the networking business.  If SAP or Oracle sells a project in a Dell account, Dell tells their customers to use their professional services to develop, install, and maintain it.

A CIO used to be able to meet with HP, Oracle, and Cisco on the same day and in the same room and the three would collaborate to show the CIO his roadmap to the future using the different technology sets and services.  Things are different now.  HP has networking with 3Com, Oracle has Sun Servers, Perot is transforming Dell, and Cisco is investing and buying new technologies to yield divisions like their new server line.  It seems that the “Strategic Alliance” may be a term of the past.

So, if customers were content with strong relationships between the technology leaders, why did all the top technology companies acquire new companies that they knew would break the partnerships they have had for years?

I think there are many answers to this and most companies will offer customer demand and accountability as the rationale.  Don’t kid yourself. These decisions are primarily financially motivated. As the leaders in technology try to fight commoditization, they see no way for sustained growth and profitability without being able to compete for every dollar that is available.

The only way they can do that is buy companies with a profile very similar to what an “Alliance Partner” looks like.  All of these companies now can compete in the infrastructure, software, and service businesses.  This all equates to “everyone versus everyone.”

So what is next?  I suspect there will be many more transactions, intense competition, and fewer “Strategic Alliances.”  Everyone is literally racing to become the one stop shop and the only way to do that quickly and with scale is through M&A.