Industry shape and sourcing advice

When Oracle started its acquisition charge six years ago, with its initial bid for PeopleSoft, few envisaged the way that things would evolve. Oracle has not been alone in making a number of strategic acquisitions. IBM made its $2.1 billion Rational Software acquisition in 2003, HP made its $4.5 billion acquisition of Mercury in 2006 and Microsoft has made numerous smaller acquisitions, such as FAST in 2008 for $1.2 billion. Ovum has estimated that over $100 billion has been spent on acquisitions in the past few years by Oracle, IBM. Microsoft, HP and SAP combined (see “The Return of the enterprise license agreement (ELA)” published in November 2008). As a result of this consolidation the market is now radically different today than it was in 2000.

Enterprise technology buyers (ETB) need to be conscious of this new landscape. Historically, it may have been prudent for CIOs to spread their spending across multiple suppliers, using competition between suppliers to keep prices keen – albeit recognizing that supplier consolidation brought benefits such as a reduction in supplier management costs. However, the portfolios of IBM, HP, Oracle and Microsoft in particular are now so wide that negotiating enterprise licensing agreements (ELAs) may now produce a better commercial outcome for the CIO buyer. As a minimum ETBs must revisit their procurement strategies and policies, to ensure that they reflect the current and future supplier landscape – one which will only see further consolidation.

Integration and value extraction

On the conference call that the combined Oracle and Sun senior executives hosted yesterday morning (PST) Oracle President, Safra Catz, gave an initial assessment of the financial impact of the deal for Oracle. Her estimate was that the transaction would generate an incremental EPS of $15 cents per share during the first year. This is a bold estimate and a clear indication that Oracle sees that it will be able to generate substantial synergies, in the same way that it has with its other acquisitions. In the current market it is difficult for most companies to see beyond the next quarter, never mind a full year. However, Oracle has a consistent track record of delivering its expected M&A bounty.

The Oracle integration team has certainly had a lot of experience in managing the integration of newly acquired companies into the Oracle fold, having managed well over 40 of these in the past 4 years. Once the acquisition has closed customers, and the market in general, should expect to see the main element of the integration completed within the first 90 days. This will see answers to the main questions around product portfolio, sales and marketing organization, customer support, etc… becoming clearer. Oracle has a track record of doing just that, and we should not expect anything different with this acquisition.

The big four and supplier positioning

The phrase “the big four” is typically associated with the IT services industry and/or management consulting and accounting firms (depending on when you entered the IT market the big 6 or big 7 may resonate more in your memory).

We are now entering a market context where the “big four” will equate to IBM, HP, Microsoft and Oracle. These suppliers will, between them, define a significant proportion of the IT market landscape for the next 10 years or more. Other vendors in the IT market need carefully to consider the traditional advice of “get big or get niche”. There is limited potential remaining in the market for another, player to acquire the scale that would take them into the “big four” league. So the majority of suppliers should ensure that they have highly competitive but specialist offerings, rather than playing to scale card.