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The hidden side of break-ups and other strategic moves in the IT sector

posted Oct 27, 2014, 8:28 AM by Julien Pillot   [ updated Oct 27, 2014, 11:07 AM ]
Very few industries appear as turbulent as the IT sector. To a greater extent than most businesses, IT firms are involved in the endless quest for innovation and strategic nimbleness. These fundamentals have a special general resonance with the current expansion of cloud computing and mobile Internet. In a sense, such innovations could be seen as “disruptive” within the meaning of Mackay and Metcalfe: these are new technologies, presenting attributes initially unfamiliar to consumers and undertakings, involving new uses and behavioral changes, and which requires major changes to infrastructure as well as a shift in market structures.

First stage of the rocket: to face such a significant paradigm shift, Big IT firms are looking for more agility and flexibility. Smaller businesses are, indeed, much more suited than Biggies to face the acceleration of technological change: lesser organizational constraints improve their responsiveness while greater proximity with consumers leads to higher product (or service) relevance and sound knowledge of latest trends. Furthermore, small-but-successful undertakings embrace highly-skilled and engaged coworkers, and perfect command of top-of-the-art technologies.

Top stage of the rocket: Biggies need fresh money to reassure financial markets. In a context of high capital volatility, risking shareholders' annoyance is not an option! In a sense, the collision between such a paradigm shift and the need for flexibility is a perfect "excuse" to force IT firms to operate some profitable break-ups. The reasons are twofold: either this is a way to capitalize on former successful acquisitions (e.g. eBay breaking-up with Paypal), or this is a means to disengage from underwhelming entities (e.g. the probable break-up between Symantec and Veritas). As a result, the IT sector is in ferment. In addition to the abovementioned break-ups, let’s mention in a nutshell:

  • The recent announcement of HP to divide itself into two entities. The former, HP Inc., will make computers and printers, while the latter, Hewlett-Packard Enterprise, will supply businesses with hardware and software and services (formerly EDS) ;

  • The announcement of JDS-Uniphase to split into on unit making optical materials and commercial lasers and another manufacturing network-testing equipment ;

  • The activist pressure on EMC to give-up its majority shareholding position in Vmware ;

  • Similar pressure on Cisco Systems ;

An astute observer will nevertheless notice straight away that the de-merged groups took particular care to give every entity a critical size to remain autonomous and competitive. For example, once achieved, HP’s break-up will create two “little giants”, each worth more than $50 billion annually. Evidence, if any, that such break-up are subject to the condition that de-merged entities remain in capacity to resist to future hostile takeovers. Despite these precautions, the insatiable appetite of other IT specialists such as Microsoft, Facebook, IBM or Google, bode well for a new wave of mergers and acquisitions. Basically, this wave will follow two different schemes:

  1. The strengthening of the ongoing concentration process in certain segments of the IT industry. Let’s mention, for instance, the recent strategic moves of IBM, Microsoft, Oracle, HP and Cisco to acquire, to divert extent, numerous small/medium businesses delivering network facilities, data centers and cloud solutions. It is now obvious that the cloud computing market and the one for associated business services are oligopolistic by nature. Biggies’ strategic challenge is to reach a critical size to take advantage, as fast as possible, of the network effects inherent in closed-user group service systems.                                                                                                                                                                                                                                                                          

  2. Strategic acquisitions of innovative start-ups which control highly valuable assets and technologies. Also, recent acquisitions of Twitch (bought by Amazon for $970 millions) and Whastapp (purchased by Facebook for $19 billion) remind us how much IT champions are likely to pay for audience-makers. With this new technologic paradigm comes new “essential facilities”, e.g. inimitable assets likely to give their owners an incontestable competitive advantage. Let’s imagine a situation in which the operation of a data center requires a very specific technology (with no substitutable asset is available at this time), then the owner of the said technology is de facto able to settle a monopoly price to its licensees.

In the second scheme lies the true epicenter of the upcoming battles in the IT sector: a merciless war for essential patents and technologies (read our previous developments relative of the patents war between Apple and Samsung). The discussions between HP and EMC – which have recently leaked in the economic press – can be seen as the will to reposition HP as a pure technological leader in the cloud computing sector. Even more interesting would be (if the present merger was to be completed) the timing of the takeover, materialized immediately after the group break-up.

Of course, all these developments are pure speculation… However, (re-)creating 2.0 champions on remnant materials of the 1.0 IT sector is the great challenge ahead for most of the alert, nimble and innovative entities flowing from the abovementioned break-ups. In such a turbulent sector, contesting the position attained by firms like Google (Search and Mobile OS), Apple (Mobile devices and software), Microsoft and Oracle (Cloud computing and software) looks like a Herculean work. Especially as the latter are also in the best position to develop (or purchase) the so-prized essential facilities…

(Photo Credits : The Break-Up, Universal Pictures, 2006, all rights reserved)