Acquisitions are nothing new in the high-tech sector. They happen quite often but many times are surprising. We look at them from several aspects. The first is what the acquiring company is trying to accomplish with the acquisition:
- Are they entering a new market?
- Are they filling a product hole?
- Are they eliminating a competitor?
- Are they buying technology that they can build upon for future products?
- Are they crazy?
The last question is not really that facetious. There are many times when a company does an acquisition and pays too much. We shake our head in wonder and try to think if we've missed something. Usually these end up being a "goodwill" write-off about two years after the acquisition. I'm sure the stockholders don't think it's goodwill.
Historically, the acquisition of a company is rarely successful. Culture differences between the companies, the exit of key employees, new processes/procedures required by the acquiring company are some of the reasons. A major one is that a more detailed understanding of what was acquired after the acquisition results in a reset of schedules and development plans. Maybe someone didn't do their homework very well.
Recently there have been several acquisitions but with a noted difference than in years past. Acquisitions now are occurring at bargain-basement prices. The lofty, mind-boggling amounts paid two years ago aren't on the table anymore. The price paid is representative of the economic condition manifested by the fact that the lack of a market or customers materializing for a start-up company has left them with little choice but to sell for a realistic amount. Either that, or liquidate. The economic conditions and the fact that many companies with ideas and products that haven't reached a positive revenue position while their money is running out will lead to more acquisitions.
The first stages are layoffs at a start-up before they have reached cash-flow positive and maybe even before the product is in general production. That is a big red flag. Alarms should be sounding. Acquisition or liquidation is sure to follow in most cases. Another stage is going out for that fourth round of financing. That's tough on the employees that have a stake in the company as their share is seriously diluted. It may be so diluted that the reason to stay is outweighed by opportunities elsewhere.
The net of all this is to look for more of these hardship acquisitions to occur over the next six months. Maybe it is a cycle but the economic conditions are going to cause more fallout than usual.
Another recent change is the announcement by BMC to phase out of the open systems storage management business. This is very interesting considering the potential growth of that market. The reality is that the market is slow to materialize (for various reasons including the economy and the lack of maturity of product solutions) and it is very competitive. The early readings are that deployment is being led by solutions sales with storage and storage management software. It will be a competitive market with probably only a few (maybe less than six) companies successful here, another economic reality.
This was first published in March 2003