The world’s largest technology companies have been on a buying spree, spending billions of dollars to snap up smaller companies. And often the buyers say they’re doing it for their customers—businesses, hospitals, government agencies, and schools, and colleges.
As tech companies get bigger and bigger, they say, they can offer a broader variety of products and make it easier for their customers to do one-stop shopping.
Yet if you ask the customers, you hear a different story. Often they get new headaches with multibillion-dollar deals by the likes of Oracle, IBM, SAP, Dell, and Hewlett-Packard. When you add the challenges that come with any corporate acquisition, it’s not hard to envision a reverse trend eventually building: a drive to split up tech companies that have grown too large.
In other words, the tech consolidation of the past few years could turn out to have wasted shareholders’ money.
“The demand is not coming from the customers,” says Gopal Khanna, who oversees a $600 million technology budget as chief information officer for the state of Minnesota. “On the contrary, I’m best served when there’s a phenomenal amount of innovation happening. … Sometimes creating behemoths slows down that innovation engine.”
Technology companies have spent more than $350 billion buying other companies worldwide over the past three-and-a-half years, according to Capital IQ, a division of Standard & Poor’s.
Hewlett-Packard Co., the world’s biggest information-technology company by revenue, has been one of the most active, in a hunt for more profit in markets other than printer ink. So has Oracle Corp., which wants to sell more types of business software and now makes computer servers after its $7 billion pickup of Sun Microsystems Inc. IBM Corp. plans to drop $20 billion over the next five years on acquisitions to strengthen its services and software divisions.
Even the education-technology field has experienced a number of high-profile mergers and acquisitions, most notably involving learning management system (LMS) provider Blackboard Inc. In the latest of these deals, Blackboard on July 7 announced plans to buy Elluminate, based in Calgary, and Wimba, based in New York, both of which support online learning and collaboration through the use of web and video conferencing software. The deals would be worth a combined $116 million if approved by the boards of both companies.
Blackboard’s announcement marks the latest in a string of acquisitions for the Washington, D.C.-based company. In the last few years, Blackboard also has snatched up rivals WebCT and Angel Learning, among other companies.
In a six-page fact sheet about the deals, Blackboard said it would continue to support the products of both Elluminate and Wimba, including their compatibility with other LMS software. “We’ll honor all existing contracts for Elluminate and Wimba clients,” the company added. Employees from the two companies will be part of a new Blackboard division called Blackboard Collaborate, to be headed by Elluminate’s current president, Maurice Heiblum.
As with other technology companies involved in acquisitions, Blackboard says it wants to give customers more options, better prices, and smarter service. It’s somewhat like buying internet, cable TV, and telephone service from one company instead of three: You’ll save money by buying the bundle, and when you need things fixed you have only “one throat to choke,” in tech-industry parlance.
The flip side is that a customer accustomed to dealing with a specialty maker of software or hardware often gets worse service after that supplier is taken over.
Campus IT officials said that while web-based learning has improved in the era of consolidation and acquisitions in the technology sector, Blackboard’s purchase of companies like Wimba and Elluminate could crush competition, and therefore innovation.
“Certainly, synchronous learning is an important part of online and blended learning today,” said Ray Schroeder, director of the University of Illinois Springfield’s Center for Online Learning, Research, and Services. “But I have concerns with the concentration of so many of the previously independent providers in our field becoming part of Blackboard. Competition is good for the consumer, in this case the colleges and universities.”
Tech acquisitions aren’t the only ones that often go bad. A seminal study by Harvard Business School professor Michael Porter examined 33 large U.S. corporations over a 36-year period and found that that they sold off many more acquisitions than they kept. Companies with acquisition strategies reduced, instead of created, shareholder value. Porter’s findings were first published in 1987, but recent studies have reinforced the conclusion.
Deals in technology can be even riskier than average, because of the complexity of the industry’s products. Although acquisitions can offer short-term financial boosts for the buyer, technology ages quickly, and acquired companies require substantial investment to keep their edge.
“When technology companies merge, you often have a two-plus-two-equals-three equation,” says Michael Cusumano, a professor at the Massachusetts Institute of Technology’s Sloan School of Management.
Undoing the poor results can be costly. VeriSign Inc. spent more than $20 billion bulking up on acquisitions in a spree that started during the dot-com days. The internet technology company got too unwieldy, and it has spent the last three years selling most of what it bought. VeriSign has gotten less than $1 billion selling off such acquisitions.
It can take years for an acquired tech company to be fully integrated with its buyer, which is one reason history is peppered with examples of acquisition flameouts that repelled customers.
One of the most famous was Compaq Computer’s 1998 takeover of computing pioneer Digital Equipment Corp., known as DEC. Like many frustrated DEC customers, Robert Rosen, who at the time was director of information management for the Army Research Laboratory, bailed on DEC because the company’s performance deteriorated under Compaq. The lab replaced its DEC servers with machines from IBM and Sun Microsystems.
Rosen, now chief information officer of the National Institute of Arthritis and Musculoskeletal and Skin Diseases of the National Institutes of Health, told the Associated Press (AP) he learned to try to pick computing suppliers that aren’t likely to be acquired.
“I sit here and I think: What mergers have really benefited everybody, both the companies and the customers? And there aren’t a whole lot. There are a lot more that go bad than are successful,” said Rosen, a former president of Share Inc., an organization of IBM customers. “I have never seen a merger that saves the customer money.”
IBM and several other large, acquiring companies declined to comment or connect an AP reporter with customers who are happy about the industry’s consolidation.
Hewlett-Packard, which also declined to comment, referred the AP to one customer, Christopher Rence, chief information officer of Fair Isaac Corp. That is the company behind the “FICO” consumer credit scores, and it often relies on tech suppliers for custom software that can help Fair Isaac accomplish specific tasks.
Rence says most acquisitions among his suppliers have worked out for his company. Still, he worries that consolidation leaves him with less negotiating leverage. He also says he and other tech buyers he knows worry about “getting hit out of left field” by an acquiring company eliminating product lines.
“When they consolidate, you’re always going to lose something—that’s just reality,” he told the AP. “But I guess I look at it as: When a big company acquires something, they’ve got the pockets to go invest in some of those areas and whatever they invest in, it’s definitely going to benefit me.”
Resigned to the idea that the industry is consolidating, many tech buyers try to plan accordingly.
Leo Collins, chief information officer of Lions Gate Entertainment, told the AP that smart tech buyers look for suppliers that are the likeliest to stick around over the long haul. If a supplier starts to struggle, he tries to move away from it before it is bought, which reduces the risk of being stuck with outdated or unsupported technologies.
Failure to do that, he says, could leave a customer “isolated in technology backwaters.”
What are your thoughts on technology industry mergers and acquisitions? Do they help, or hurt, customers in the long run? What has been your experience with tech companies that have merged? Share your thoughts in the comments section below.
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