Mega deals to drive infotech in 200529 December 2004
Last two weeks have witnessed some mega deals that have not only surprised industry watchers but also leave a far-reaching impact on future of the sector. Let us look at the recent flurry of consolidation moves promising fresh and interesting market dynamics in 2005.
IBM - a pioneer of computer business - has sold its PC hardware division to Lenovo, the largest computer company of China and formerly known as Legend. An estimated deal worth $1.7 billion involves $600 million cash and an 18.9 per cent stake worth $600 million in Lenovo to IBM. The Chinese company has also taken around $500 million in debt. As part of the deal, around 10,000 IBM employees will shift to Lenovo, which will relocate its headquarters from Beijing to New York. Interestingly, most of IBM hardware operations were based in China employing about 75 per cent of IBM hardware division staff.
PC business was one of the lowest margin earners for IBM and the company now plans to focus on its more lucrative operations like servers, storage, software, chips and services. The move is being seen as a significant development in global PC industry. This brings the Chinese companies and China, which was just a low cost electronics components manufacturing destination so far, in the forefront of global computer market. Moreover, it will be interesting to see what other major PC makers like Dell and Hewlett-Packard will drive out of the exit of PC pioneer from the ring.
In another significant development, Oracle finally won the one-sided love battle of luring and marrying reluctant PeopleSoft. After 18 months, six revised offers and three lawsuits, the marriage of Oracle and PeopleSoft was finally announced on December 13. At last, Oracle raised its offer to $26.50 for each share of PeopleSoft and boards of both the companies agreed to the acquisition estimated to be valued at around $10.3 billion.
The deal will have a major impact on enterprise software market. Oracle - with PeopleSoft and JD Edwards (acquired by PeopleSoft early this year) under its wings--will now be more powerful to fight with the largest enterprise software solution provider, SAP of Germany. However, Oracle will have to face a tough challenge of retaining PeopleSoft customers.
Just a couple of days after Oracle-PeopleSoft announcement, another enterprise software major Siebel Systems announced that it would acquire eDocs , a maker of e-billing and customer self-service applications, for $115 million. This will help Siebal to provide a broader range of front-office applications with its CRM suite enhancing its product and customer portfolios. Though not a very significant development, this deal will increase Siebal's strength in competing with more powerful Oracle.
Industry analysts were about to hang their gloves after dissecting these deals when computer security giant Symantec disclosed its plan to buy storage solution firm Veritas Software to form the world's fourth largest software maker. The all-stock acquisition was valued at $13.5 billion. With this deal, Symantec plans to create a single vendor edge for itself in the market by offering both computer security as well as storage solutions.
In another mega deal last week, one of the largest telecom service providers in the US, Sprint has announced to acquire Nextel Communications, a relatively small player in a $35 billion deal. The move has again heated up the consolidation talks in the infotech and telecom industry. The Nextel acquisition will make Sprint a strong third player after Cingular and Verizon and making it richer in terms of coverage, bandwidth and customers.
Irrespective of size and impact, these deals reflect the new realities of the industry. Biggies are getting bigger to acquire more market power with an exception of IBM that seems to be cutting flab to keep itself more agile. Lets face it. It's no more a fat-margin high-tech lucrative industry. More educated and aware customers are demanding better products and services at the lowest possible prices. The companies have been through a four years slowdown and have done almost everything to minimize the cost of operations.
When margins are tumbling down and avenues of saving internal costs are exhausting, it becomes inevitable for businesses to grow bigger to achieve scale of operation to hold slipping bottom lines. Acquisitions make sense. Especially when you are sitting on a heap of cash and stock market upswings have set the valuation expectations right on both the sides. And acquiring a rival also compresses the competition to a few juggernauts. Much more action is expected in the year to come. Lets wait, and watch the game.
Source: Daily Pioneer
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