Amid today's economic tempest, companies across the IT landscape are pulling together to weather the storm.
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Each day's headlines offer a slew of new corporate deals. With everything from minor partnerships to mega mergers, it is easy to understand why IT customers are struggling to determine which deals matter.
Tom Kucharvy, president of the Boston, Mass.-based analyst firm Summit Strategies, Inc., said that when judging the impact of a merger, acquisition or partnership involving a vendor, a customer should compare existing expectations against results.
He said a deal should better address the long-term business needs of customers. In addition, customers should be wary of whether companies proposing deals can "pull it off" without harming customers or their businesses.
If a deal involves integration of products or services between two companies, Kucharvy said customers should watch out for trouble signs like fewer products or product lines, declining customer service, or slow response to competition.
Nicole Gallant, senior analyst of software partnering and alliances with Framingham, Mass.-based International Data Corp. (IDC), said a deal may be going well if two parties repeatedly invest in one another or in joint technology, marketing and training initiatives.
Since the economy is down right now, Gallant said some companies will inevitably announce deals that have more public relations value than true impact on customers.
However, she said she's seen "a much more concerted effort to have much fewer of those relationships and focus on meaningful, strategic relationships, and making sure those alliance agreements are executed."
The anatomy of the deal
Kucharvy said business deals, especially mergers, can be divided into two categories: offensive and defensive.
Offensive mergers are attempts to extend an already strong market position by moving deeper or further across a value chain to provide a more comprehensive product or service. Defensive mergers happen because one or both parties lack internal strength or resources to be independently successful.
Illustrations can be drawn from two deals Kucharvy called the year's biggest: Hewlett-Packard Co.'s planned merger with Compaq Computer Corp., and WorldCom Inc.'s acquisition of controlling interest in Web-hoster Digex Inc. In September, HP announced it would, pending shareholder approval, acquire rival Compaq for $25 billion in stock. The deal would unite two powerhouse hardware vendors and strengthen HP's services unit, but several major shareholders -- including the David and Lucile Packard Foundation, HP's top shareholder -- oppose the deal. A definitive shareholder vote is expected in early 2002.
Kucharvy said the pending HP/Compaq deal, which signals the consolidation of the lucrative server and storage markets, is defensive because both companies -- especially Compaq -- are in rough shape. Each is a near mirror image of the other in the PC and server markets, where competition is rising and profit margins are dropping. The two have also made similar efforts this year to rely more on revenue from providing services.
"Without a merger, it'll be very tough for Compaq to survive," said Kucharvy, because lost market share, revenue and credibility -- should the deal collapse -- would be too much to overcome. "But, if the deal does go through, HP is going to have a very hard time integrating them, and if they fail, it could destroy the company."
Conversely, he said January's WorldCom-Digex deal was offensive because, as an already strong company, WorldCom desired control over more Internet infrastructure.
"(The acquisition) signals that the infrastructure for running the Internet is going to be delivered by a handful of highly centralized companies that own the entire Internet delivery ecosystem -- ranging from the pipes to the facilities to the servers -- through a fully managed environment that goes all the way up to the application level," said Kucharvy.
In the software world, Gallant said there were no partnerships in 2001 that "knocked anyone's socks off," but powerhouse companies like IBM Corp., SAP AG, Siebel Systems Inc. and BEA Systems Inc. are mining existing partnerships for new business opportunities.
The future: One big company?
Will the natural course of events lead to a monstrous company eventually owning the entire IT landscape? Possibly, said Kucharvy, but it's more likely that at least a few significant deals won't happen until the latter half of 2002.
"I think those companies who weather the storm fairly well are in a good position to be able to acquire, but right now, with so much uncertainly, it's too dangerous for a lot of that unless it's really defensive," he said.
Gallant said the software industry is too diverse for one company to control it. However, she said alliances will be a theme in the market next year because vendors must work together to deliver the technology integration that customers demand.
"I certainly think companies are going to continue to build alliances that make it easier to address challenges," Gallant said. "That's the beauty of an alliance. You can take the really good parts (of a company) and you don't have to deal with the rest of it."
Though there is no sure-fire crystal ball for users to predict which deals will happen, Kucharvy said customers could anticipate likely scenarios if they understand what makes the market tick.
"I think that it really requires a holistic view of the extended enterprise, and of the extended segments in which the company operates," said Kucharvy. "You have to have a good enough feel for the strengths and weaknesses of the two organizations to understand how effectively they'll be able to mesh."FOR MORE INFORMATION:
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