Field Study
Mergers & Acquisitions concepts applied to the technology sector
March 20, 2013
M&A concepts applied to the technology sector | March 20, 2013
1
1. Introduction
2. Concepts
3. Case: Oracle Sun
4. Drivers for M&A in the technology sector
5. Case introduction: Google Motorola
M&A concepts applied to the technology sector | March 20, 2013
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Introduction
M&A types
M&A types
• Industrial
• Vertical
• Horizontal
• Size, market power
• Diversity, product
range, cross selling
• Financial
• P/E
• leveraging –
diversification
• Market power : intended, not
announced
Vertical
• Absorb suppliers, absorb
transformers, absorb
distributors, “capturing the
value chain”
• Security of supplies, of
outlet.
• Importance of make-or-buy
decision. Opportunity
costing
• Own your real estate
airplanes, ships, …?
• Own your suppliers,
distributors What are core
suppliers, distributors?
M&A concepts applied to the technology sector | March 20, 2013
Horizontal
• Size: production efficiency
• Purchasing power
• Production economies of
scale
• Barrier to entry –
minimum size –
technology ?
• Efficiency – flexibility
• Outsourcing - offshoring
• Size: distribution efficiency
• Marketing power
• Production economies of
scope
• Replicating sales and
marketing processes to new
products / new markets
Adapted from M&A Part I
3
Introduction
Scope
•
In scope

•
Industrial M&A in the technology sector
Out of scope


Financial M&A and conglomeration or acquisitions that build or optimize the parent
company’s portfolio of businesses
Market power and competition issues
M&A concepts applied to the technology sector | March 20, 2013
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Introduction
Key messages
•
When a CEO wants to boost corporate performance or jump-start long-term
growth, the thought of acquiring another company can be extraordinarily
seductive
•
Indeed, companies spend more than $2 trillion on acquisitions every
year
•
Yet study after study puts the failure rate of mergers and acquisitions
somewhere between 70% and 90%.
Companies too often pay the wrong price and integrate the acquisition in
the wrong way
The success or failure of an acquisition lies in the nuts and bolts of
integration.
•
•
The New M&A Playbook, C. Christensen, R. Alton, C. Rising, and A. Waldeck, HBR, March 2011
M&A concepts applied to the technology sector | March 20, 2013
5
1. Introduction
2. Concepts
3. Case: Oracle Sun
4. Drivers for M&A in the technology sector
5. Case introduction: Google Motorola
M&A concepts applied to the technology sector | March 20, 2013
6
Concepts
Focus on acquisition integration with the article: The New M&A Playbook, C.
Christensen, R. Alton, C. Rising, and A. Waldeck, HBR, March 2011
Command
Higher Prices
Leverage
My
Business
Model
To improve a product or service that’s
still developing, one whose customers
are willing to pay for better functionality.
Low Price
Lower Cost
The parent plugs certain resources from
the acquisition into its existing model,
jettisoning the rest of the acquired
model and shutting down, laying off, or
selling redundant resources.
Acquire
Disruptive
Business
Model
The most reliable sources of
unexpected growth in revenues and
margins are disruptive products and
business models.
M&A goals
Reinvent
My
Business
Model
High Price
Acquiring to
Decommotize
M&A concepts applied to the technology sector | March 20, 2013
One of the most effective ways to use
RBM acquisitions is as a defense
against commoditization.
7
The New M&A Playbook, C. Christensen, R. Alton, C. Rising, and A. Waldeck, HBR, March 2011
Concepts
RBM example: Oracle Sun
Acquire
Disruptive
Business Model
• Disruptive companies are those
whose initial products are simpler
and more affordable than the
established players’ offerings.
• They secure their foothold in the
low end of the market and then
move to higher-performance,
higher-margin products, market,
tier by market tier.
Migrate to “where
the profits will be”
Cloud
Computing
RBM
• If a firm finds itself being
commoditized in this way,
acquisitions won’t improve the
output of its profit formula
Acquiring to
Decommotize
• Firms in this situation should
instead migrate to “where the
profits will be”—the point in the
value chain that will capture the
best margins in the future.
M&A concepts applied to the technology sector | March 20, 2013
Oracle Exalogic
and Exadata
Salesforce.com’s
new multi-year contract
enables them to continue
building virtually all of their
cloud services on
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The New M&A Playbook, C. Christensen, R. Alton, C. Rising, and A. Waldeck, HBR, March 2011
Concepts
Key question
What elements of the business model will change?
•
Customer value proposition

•
Profit formula


•
Revenue model
Cost structure
Resources

•
Offering that helps customers do an important job more effectively, conveniently, or
affordably than the alternatives.
Employees, customers, technology, products, facilities, and cash
Processes

Manufacturing, R&D, budgeting, and sales.
The New M&A Playbook, C. Christensen, R. Alton, C. Rising, and A. Waldeck, HBR, March 2011
M&A concepts applied to the technology sector | March 20, 2013
9
1. Introduction
2. Concepts
3. Case: Oracle Sun
4. Drivers for M&A in the technology sector
5. Case introduction: Google Motorola
M&A concepts applied to the technology sector | March 20, 2013
10
Case Oracle Sun
1. Oracle
2. Oracle acquisition strategy
3. Sun deal
4. Implementation highlights



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


Role of the banker
Role of the consultant
Communication
Stakeholder management
Branding
Advertizing
Management
5. Legal and regulatory
M&A concepts applied to the technology sector | March 20, 2013
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1. Oracle
Founded in 1980, Oracle is the largest business software company in the world, with
345,000 customers - including 100 of the Fortune Global 100 - and supports these
customers in more than 145 countries.
• Oracle business model is based on products
and services:



Database products
Middleware products
Application products
•
•
•
•
•

Logistics
Financials
HR
CRM
Business Intelligence
Consulting services for all products
• Oracle’s strategy is based on three
differentiation levers:



Technology products
Business application products
Open standard products
• This translates into frontal competition
with Microsoft, SAP and IBM
(3) Open Standards
• Oracle main competitors are:



IBM for database and middleware software
SAP for application software
Microsoft for database, middleware and business
software
IBM
SAP
Oracle
• Sun is at the same time:



A competitor of Oracle in the database market, with
MySql
A competitor of IBM in the Unix server market
A key enabler for Oracle and IBM with the Java plateform, in the middleware market
(1) Technology
Microsoft
(2) Applications
Oracle = (1) + (2) + (3)
M&A concepts applied to the technology sector | March 20, 2013
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1. Oracle
Oracle stock outperforms market and peers
Oracle stock outperforms NASDAQ, S&P 500,
DOW
Oracle stock outperforms SAP, Microsoft, IBM
and CISCO
Only Google, Amazon and Apple stocks are
doing better
M&A concepts applied to the technology sector | March 20, 2013
Source: FT
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1. Oracle
Impressive margins, cash rich, and levered, unlike other software companies
AAPL net income = 8.24bn, Google net income = 6.52bn, Amazon net income = 902.00m, Oracle net income = 5.59bn, Microsoft net income = 14.57bn, SAP net income =
1.79bn, IBM net income = 13.43bn, DELL gross margin = 18%, IBM gross margin = 45%, SUN gross margin = 45%
Source: FT
M&A concepts applied to the technology sector | March 20, 2013
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2 Oracle acquisition strategy
Principles
• Oracle brazenly acknowledges that it creates innovation and innovative products by buying them from
others. This thinking, of course, is at odds with the long-held and romanticized view of innovation in Silicon Valley
• "It's crazy to say you will only grow through innovation," said Oracle CEO Larry Ellison a couple of weeks
ago in a New York Times article. "It's bizarre that there's a stigma to buying something rather than building it
yourself."
M&A concepts applied to the technology sector | March 20, 2013
Source: http://www.cio.com/article/print/195950
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3. Sun deal
Acquisition strategy rationale (BEFORE)
•
Oracle to acquire Sun Microsystems (“Sun”)



•
About Sun



•
Purchase price of $9.50 per share in cash
Approximately $7.4 billion in equity value; $5.6 billion net of cash and debt
Transaction closed in January 2010
Leading provider of standards-based computing infrastructure, including enterprise
computing systems, software and storage
Headquartered in Santa Clara, CA
30,000 employees worldwide, 47,000 enterprise customers worldwide
Industry transforming acquisition



Combines best-in-class enterprise software and mission-critical computing systems
Expected to deliver an integrated system, from applications to disk, optimized for higher
performance, improved reliability and enhanced security
Customers expected to benefit from decreased systems integration costs, and improved
performance, reliability, and security
M&A concepts applied to the technology sector | March 20, 2013
Source: Oracle Web Site
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3. Sun deal
Acquisition strategy rationale (BEFORE)
The Most Complete and Open
Enterprise Technology Stack








Open and standards-based
Optimized, integrated and extensible
Higher performance, improved reliability and
enhanced security
Shorter deployment times
Easier to manage and upgrade
Lower cost of ownership
Reduced change management risk
Integrated support
New products
M&A concepts applied to the technology sector | March 20, 2013
Source: Oracle Web Site
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3. Sun deal
Acquisition strategy rationale (AFTER)
•
Customer value proposition: Exalogic / Exadata

•
Profit formula: applying Oracle operating margin (45%) to Sun


•
Premium pricing vs open source pricing
Leaner cost structure
Resources: more investment in innovation and R&D

•
Radically simplify the integration between software and hardware
Development of employees, customers, technology, products, facilities, and cash
Processes: alignment and optimization

Optimizing sales (direct sales, strict control of Value Added Resellers), streamlining user
support, integrated marketing, shared R&D, integrated back offices
2011
Hardware Systems Revenues
$7,092 M
M&A concepts applied to the technology sector | March 20, 2013
2010
$2,418 M
+193%
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4. Implementation highlights
Role of the banker
Charles E. Phillips is President of Oracle Corporation
and a member of the Board of Directors.
He joined Oracle in 2003. Before joining Oracle, Mr.
Phillips was with Morgan Stanley, a global investment
bank.
“Phillips (alongside Goldman Sachs' Rick Sherlund) had
been widely regarded as the most influential software
analyst on the sell-side and a major advocate for
software M&A; particularly after the bubble burst and the
industry began a maturation phase”, http://woodrow.typepad.com
Safra A. Catz has been President of Oracle Corporation
since January 2004 and a member of the Board of
Directors since October 2001.
She served as Oracle’s Chief Financial Officer from
November 2005 to September 2008, as Executive Vice
President from November 1999 to January 2004, and as
Senior Vice President from April 1999 to October 1999.
In May 2008, Ms. Catz was also appointed to a threeyear term as member of the board of directors for HSBC
Holdings plc, one of the world's largest banking and
financial services organizations.
Phillips and Catz are Larry Ellison’s arms with regards to M&A strategy and
implementation. Phillips identifies the targets. Catz monitors the implementation and the
value creation.
M&A concepts applied to the technology sector | March 20, 2013
Source: Oracle Web Site
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4. Implementation highlights
Role of the consultant
Some lessons learned, Doug Kehring, an Oracle SVP for corporate development
•
For one, it doesn’t work with bankers - it has a bank in house. Oracle, doesn’t use
bankers, not even for the contentious, $8.5 billion acquisition of BEA Systems Inc. in
January. Instead it relies on co-presidents Chuck Phillips and Safra Katz, backed up
by Kehring and a 16-person strategy and corp dev team. Chairman Larry Ellison has
also been known to weigh in from time to time.
•
Oracle is similarly self-reliant on integration, trying a big consulting firm on the 2005
PeopleSoft integration but deciding to do things itself instead. Kehring says speed is
paramount in Oracle’s integrations, and that targets immediately adopt Oracle’s
back-office policies. “We’re buying the go-to-market part of the business,” he said.
•
Kehring also talked about the importance of communicating about deals in the media,
a lesson that Microsoft is learning now. He noted that Microsoft has had different
executives saying different things.
Oracle is relentlessly focused - on strategy, on integration, on message.
M&A concepts applied to the technology sector | March 20, 2013
Source: http://industry.bnet.com/technology/100015/Oracle Speaks on M&A, Is Microsoft Listening?
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4. Implementation highlights
Communication: centralized, structured, focused www.oracle.com/sun
M&A concepts applied to the technology sector | March 20, 2013
Source: Oracle Web Site
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4. Implementation highlights
Stakeholder management: what’s in it for me?
M&A concepts applied to the technology sector | March 20, 2013
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4. Implementation highlights
Branding
M&A concepts applied to the technology sector | March 20, 2013
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4. Implementation highlights
Advertising
M&A concepts applied to the technology sector | March 20, 2013
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4. Implementation highlights
Management
Mark Hurd is President of Oracle Corporation and a
member of the company's Board of Directors. He joined
Oracle in 2010. As President, Mr. Hurd oversees the
corporate direction and strategy for Oracle's global field
operations, including marketing, sales, consulting,
alliances and channels, and support. He focuses on
strategy, leadership, innovation, and customers.
Before joining Oracle, Mr. Hurd served as Chairman of
the Board, Chief Executive Officer, and President of HP,
where his focus on customers, innovation, improved
operational efficiency and execution led to significant
company growth.
Safra A. Catz has been President of Oracle Corporation
since January 2004 and a member of the Board of
Directors since October 2001.
She served as Oracle’s Chief Financial Officer from
November 2005 to September 2008, as Executive Vice
President from November 1999 to January 2004, and as
Senior Vice President from April 1999 to October 1999.
In May 2008, Ms. Catz was also appointed to a threeyear term as member of the board of directors for HSBC
Holdings plc, one of the world's largest banking and
financial services organizations.
Mark Hurd, former CEO of HP has replaced Charles E. Phillips as President
M&A concepts applied to the technology sector | March 20, 2013
Source: Oracle Web Site
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5. Legal and regulatory
Anything Europe could say about the deal?
EU Commission
•The acquisition of Sun Microsystems by Oracle
Corporation was completed by Oracle on January 27,
2010. Significantly, Oracle, previously only a software
vendor, now owned both hardware and software product
lines from Sun (e.g. SPARCstations and Java,
respectively).
•A major issue of the purchase was the fact that Sun was
a major competitor to Oracle, raising many concerns
among antitrust regulators, open source advocates,
customers, and employees. The EU Commission
delayed the acquisition for several months over concerns
of Oracle's plans for MySQL, Sun's competitor to the
Oracle Database. The commission finally approved the
takeover, apparently pressured by the U.S. to do so,
according to a Wikileaks cable released in September
2011.
•Source: Wikipedia
M&A concepts applied to the technology sector | March 20, 2013
Oracle Android Lawsuit
•Oracle filed a patent infringement lawsuit against
Google over its use of Java in the Android platform.
Android apps run in the Dalvik Java virtual machine. The
apps are written in Java but are compiled into Dalvik's
custom bytecode format which is incompatible with
standard Java runtime environments. Google thus
avoided licensing fees associated with J2ME, the mobile
version of Java. However, aspects of the Dalvik system
are very similar to the Java technology patented by Sun
and now Oracle.
•The court found that Oracle's primary copyright claim,
based on the Java Application Programming Interface
(API), failed because the portions Google reused were
not copyrightable. Google was found liable for a small
amount of literal code copying. Oracle will be limited to
statutory damages for these claims. The jury found that
Google did not infringe Oracle's patents. Oracle has said
they will appeal.
•Regardless of the legal merits, commentators have
questioned the wisdom of the lawsuit over Android, a
platform which has reinvigorated the Java community. In
addition, it gave another worrying signal to open source
community members
•Source Wikipedia
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1. Introduction
2. Concepts
3. Case: Oracle Sun
4. Drivers for M&A in the technology sector
5. Case introduction: Google Motorola
M&A concepts applied to the technology sector | March 20, 2013
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Drivers for M&A in the technology sector
Vertical and horizontal integration context
Vertical and horizontal integration
strategies
Consumers
Enterprises
Services
Google,
Amazon,
Apple
IBM, HP
Software
Microsoft,
Apple,
Google
IBM, Oracle,
SAP,
Microsoft,
HP
Hardware
Apple, HP
IBM, Oracle,
HP
Have impacts on revenues,
margins and profit
Revenue
Margin
Profit
IBM and vertical integration in the eighties, Microsoft and horizontal integration in the
nineties, Apple and vertical integration today. Who’s next?
M&A concepts applied to the technology sector | March 20, 2013
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Drivers for M&A in the technology sector
Manufacturing and Intellectual Property (IP) pay off
16 business models
Differentiated returns
% of revenue by asset type and asset right
The Business Models investors prefer, P. Weill, T. Malone, T. Apel, Center for Information Systems Research, Research
Brief, November 2011
Temptation for the Manufacturer / Innovator (investing above their industry average in R&D like
AAPL) and IP Landlord (like MSFT) models is great
M&A concepts applied to the technology sector | March 20, 2013
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1. Introduction
2. Concepts
3. Case: Oracle Sun
4. Drivers for M&A in the technology sector
5. Case introduction: Google Motorola
M&A concepts applied to the technology sector | March 20, 2013
30
Google Motorola
Analysis framework: M&A goal
Command
Higher Prices
Leverage
My
Business
Model
To improve a product or service that’s
still developing, one whose customers
are willing to pay for better functionality.
Low Price
Lower Cost
The parent plugs certain resources from
the acquisition into its existing model,
jettisoning the rest of the acquired
model and shutting down, laying off, or
selling redundant resources.
Acquire
Disruptive
Business
Model
The most reliable sources of
unexpected growth in revenues and
margins are disruptive products and
business models.
M&A goals
Reinvent
My
Business
Model
High Price
Acquiring to
Decommotize
M&A concepts applied to the technology sector | March 20, 2013
One of the most effective ways to use
RBM acquisitions is as a defense
against commoditization.
31
The New M&A Playbook, C. Christensen, R. Alton, C. Rising, and A. Waldeck, HBR, March 2011
Google Motorola
Analysis framework: what elements of Motorola will Google change?
•
Why doing the deal


•
What elements of the business model will change




•
Drivers
Price
Customer value proposition: an offering that helps customers do an important job more
effectively, conveniently, or affordably than the alternatives.
Profit formula: revenue model and a cost structure
Resources—such as employees, customers, technology, products, facilities, and cash
Processes such as manufacturing, R&D, budgeting, and sales.
How, who, when?

Features of the implementation plan
M&A concepts applied to the technology sector | March 20, 2013
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Google Motorola
By Richard Waters, Financial Times
Vertical success requires more than just a Motorola
“Verticalisation” is an ungainly word for what has
become a highly fashionable trend in the tech world.
With Google slapping down $12.5bn in cash this week to
buy Motorola Mobility, the idea just received another big
boost. But like many business fashions, there is a risk
that this one is about to become an uncontrollable
bandwagon – with unhappy consequences.
Until recently, the idea that the best products come from
companies that combine both hardware and software
expertise under the same roof went against the grain of
accepted thinking in technology. The PC era was built on
a horizontal model, with different companies supplying
everything from the chips to hardware and operating
system. That was itself a reversal of an earlier
computing era dominated by IBM’s integrated
mainframe computers.
It took Apple to bring things back to the future. With the
iPhone – and now the iPad – it has gone even further,
building out its own chain of retail stores and, through
the App Store, corralling the services that breathe life
into its devices. With a move into chip design, it has
even taken control of the most important component in
its hardware.
M&A concepts applied to the technology sector | March 20, 2013
Google’s hardware hire must move fast
to catch Apple
Why would an internet company hire
someone who has played a key role in
the world’s most impressive hardware
supply chain?
The response to that question could
also provide an answer to one of the
more intriguing questions hanging over
some of the leading software and
internet concerns: are they preparing a
deeper push into the hardware
business? If so, their business models
and margin profiles could be in for a
drastic change.
By Richard Waters, Financial Times
33