Dell is doing a mega-deal to acquire EMC for $67 billion. Activist investors are talking up the glory of putting together Mitel and Polycom. To both I say, "Good luck with that." The dirty little secret of the past decade or so is large tech mergers are, at best, neutral. At worst, they are ongoing disasters.
For as much as I am annoyed with Apple, the company has managed its continued success without a single billion dollar buy. Microsoft, despite its hiccups over the years, has never had to resort to buying big in order to keep and sustain growth.
There's nothing wrong with acquisitions per say, but the best value seems to come from larger companies making smaller deals to acquire a particular technology and/or talent base. As deals grow from hundreds of millions to billions of dollars, the likelihood of success and a decent return on success seems to dramatically decrease.
Cisco is a good example of why writing billion dollar checks to buy companies is not a strategy for sustained growth. At the height of the (admittedly-inflated) dot.com bubble, the company was worth $500 billion on paper. Today's market cap is around $141 billion and this after it has bought names such as Linksys ($500 million in 2003), Scientific Atlanta ($6.9 billion in 2005), NDS ($5 billion, 2013), Sourcefire ($2.7 billion, 2013).
The (much devalued) leftovers from Linksys and Scientific Atlanta were sold off by Cisco to Belkin and Technicolor SA respectively, with the latter deal netting $600 million in 2015. Considering that Cisco paid over 10 times that amount for Scientific Atlanta, you really can't say "genius" and "acquisitions success" in the same sentence.
HP has done little better, collecting EDS ($13 billion), 3Com ($2.7 billion), Palm ($1.2 billion), and Autonomy ($9 billion) while shedding billions in market cap and tens of thousands of jobs. The only redeeming lesson to be learned from HP's journey is the company finally figured out it was better off splitting into two different companies to serve enterprise customers and sell hardware than trying to glom on more business lines.
The terms alone for the Dell-EMC deal should give people pause. Dell is working with a group of eight banks to provide up to $49 billion in financing. There's likely to be a good chunk of pension plans and 401(k) money backing the deal. When the deal closes, estimates are the combine entity will have $56 billion in debt with a rough estimate of $10 billion to $11 billion in EBITDA coming in. Assuming no sales downturn, Dell-E will be paying off its bills for any number of years.
Dell says it can pay off the debt in 18 to 24 months – and it may make a good start, if it starts unloading bits and pieces of EMC. Speculation is it would ditch a cloud management company EMC bought back in May, RSA security, and other bits. Crazy talks says Dell would sell its PC division to the latest "New" HP for some cash as well, but that strikes me as a big reach given HP's move this month in splitting the company between enterprise services and PCs. IBM bailed out of PC-style hardware a while ago and the market is chaotically fractured between desktop and mobile hardware. With big data shops such as Amazon, Google, and Facebook building their own servers and movement/consolidation into cloud services, there's not a lot of upside for booming growth.
A Mitel-Polycom merger, as Elliott Management wants, is an interesting idea. Certainly, Mitel has been on an acquisition tear over the past couple of years. But the upside here, other than for shareholders getting a premium for currently held stock, is missing. IP phones are a commodity, with new entrants like Yealink emphasizing a combination of engineering quality at a better price point. Videoconferencing hardware remains a high-end, enterprise niche while the rest of the world has going to the cloud via desktop and mobile devices. Polycom has a brand and reputation for quality, but being bought by Mitel takes away Polycom's status as an independent phone choice for IP cloud and PBX solutions. And the IP phone market at large will continue to be battered by BYOD-based mobile solutions as businesses ease out of desktop phones.
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