With many of the big tech companies hording piles of cash and many unstable companies licking their wounds from the recession, the tech industry is ripe for consolidation. See which potential acquisitions would make the most sense.———————————————————————————————————————————————————————————————————————————
In this economy, cash is king. Since in the end of 2008, big tech companies have been stuffing cash under their mattresses in case the current recession goes longer and deeper than expected. Even companies with strong balance sheets have been cutting costs, laying off workers, and scaling back projects in order to build up their war chests.
As a result, you have companies racking up huge cash reserves, including Cisco ($26.7 billion), Apple ($24.5 billion), Microsoft ($19.7 billion), and Google ($14.4 billion).
Meanwhile, with the stock market shedding half of its value between July 2007 and January 2009, the market price of a lot of public technology companies has essentially been put on a "50% off sale."
This creates an atmosphere that is ripe for consolidation. As soon as the companies with the cash have confidence that the economy is at an inflection point, they will start spending money to position themselves for the turnaround.
We may be starting to see it. The Dow Jones Industrial Average has jumped over 1,000 points in the past 30 days. While that may be nothing more than a bear rally, during this time we've seen IBM make a play for Sun Microsystems. Although that deal fell apart, we should expect more tech acquisitions in 2009. Here are the seven most likely deals.
7. Apple buys Adobe
Apple has an extremely strong balance sheet, so you would expect it to be one of the first companies to go on a buying spree, but Apple historically does not do many acquisitions. Its most high-profile purchase was NeXT in 1997 - the move that brought Steve Jobs back to Apple.
The biggest acquisition you're likely to see from Apple in 2009 would be to buy Adobe, which has a wide array of software tools for graphic artists, photographers, and Web designers - some of Apple's most loyal Macintosh customers. With the iPhone and its App Store, Apple appears to have learned the lesson that the software makes the platform. And since Adobe is already building online tools such as Photoshop Express, it could also help Apple get a jump on the next generation of applications.
Of course, the big question mark here is that Adobe also makes its software for the Windows platform - and certainly sells more to Windows users - so if Apple bought Adobe would it make Adobe software Mac-only to try to drive more artists and designers to its platform, or would it use the opportunity to grow its software revenue from Windows users?
6. Oracle buys Salesforce.com
Oracle has talked a good game about cloud computing for a long time - long before it was actually called "cloud computing" - but the company is also heavily invested in the old software licensing model because that's where nearly all of Oracle's revenue comes from. So Oracle is making a glacial transition from the old world to the new world.
Salesforce.com is business world's most successful Software-as-a-Service application and its founder and CEO, Marc Benioff, was a 13-year Oracle veteran before he left to start Salesforce.com. Thus, Benioff knows Oracle CEO Larry Ellison very well. Many in Silicon Valley expect that it's only a matter of time before Oracle scoops up Salesforce.com at a fair price.
Has Salesforce.com matured enough and does Oracle feel threatened enough by other online application competitors to make 2009 the year for this acquisition to happen? The odds are probably 50/50.
5. Google buys Skype
Nearly everyone in the technology industry scratched their heads in September 2005 when eBay bought Skype for $2.6 billion. Why would an online auction site want to purchase peer-to-peer VoIP and collaboration software? Three and half years later, it still doesn't make sense.
In fact, in October 2007, eBay took a $900 million write-down of Skype - an acknowledgement that Skype wasn't worth as much as eBay had paid for it two years earlier. There are even rumors that Skype founders Niklas Zennstrom and Janus Friis are trying to convince private equity firms to help them buy back Skype from eBay.
One of the losing bidders for Skype at the time eBay bought it was Google. Since then, Google has launched Google Voice and Google Chat but has barely made a dent in Skype's market share. Google reportedly walked away in 2005 when the price got too high. The price would be much more palatable now, and Google still wants to find a place in the real-time communications market, so this could be an ideal play.
If not Google, then look for Cisco as another potential suitor for Skype. Cisco could make Skype interoperate with its enterprise VoIP systems and expand Skype to include some of the same communication and collaboration tools that Cisco has built into its enterprise VoIP software.UPDATE: EBay now says that it will spin off Skype with an IPO in 2010; however, Skype remains a viable acquisition target in the meantime.
4. Microsoft buys Palm
Despite the fact that Microsoft has been in the mobile PDA/smartphone market for over a decade with Windows Mobile (formerly Windows CE) and has respectable market share numbers, the company's software lags woefully behind iPhone, BlackBerry, and Symbian, and there's no indication that Microsoft is making major progress.
Since 2008 was the first year that smartphones outsold laptops, it's clear that smartphones are increasingly becoming valuable "computers" for consumers and professionals on the go, and the smartphone market is a huge growth business in the years ahead.
Thus, Microsoft needs to make a bold move in the mobile space. The best option for making up ground quickly would be to buy Palm. The popularizer of the PDA has mobile development baked into it genetic structure, plus it has former Apple executive John Rubinstein, and it has its new Palm webOS, a next generation mobile platform that could give Microsoft the opportunity to get a jump on Apple, RIM, and Nokia.
3. IBM buys Red Hat
These two have had a 10-year partnership that has helped propel Linux into the mainstream as a viable platform in the data center. IBM clearly wants to dislodge itself from Microsoft's grip as much as possible and, as such, is promoting "Big Green Linux," "Security-Enhanced Linux," even corporate Linux desktops.
The best way to ramp up these strategies would be to go beyond cooperation and coordination with Red Hat and simply buy the company and integrate it into IBM. If IBM doesn't buy Red Hat, look for Oracle to make a run at it. Oracle already offers support contracts for Red Hat Linux since its software runs on top of Red Hat as one of its primary platforms.
2. Cisco buys VMware
Enterprise storage giant EMC acquired VMware for $635 million in 2003, so technically VMware is not for sale. However, while VMware is the current market leader in virtualization, it is under attack from Citrix and Microsoft, and EMC can't necessarily do a whole lot to help so you could see EMC sell VMware.
Meanwhile, last month Cisco announced its intention in jump into the data center market with blade servers, and it named a variety of the partners involved in the initiative, including VMware. Cisco wants to go big with virtualization and make it mainstream as quickly as possible in order to use the technology to make data centers more flexible, more manageable, and more energy-efficient.
While Microsoft and Citrix have VMware surrounded in the virtualization market, and could use their advantages to undermine VMware, Cisco has deep pockets to help develop the technology, plus a variety of other data center technologies to integrate VMware with, and a powerful marketing engine to promote it.
1. Dell and EMC merge
Perhaps the biggest technology deal of 2009 could be a tie-up between Dell and EMC, which would nearly rival the HP-Compaq blockbuster in 2001. Like other pairings on this list, Dell and EMC have had a long-term partnership so they already know each other well.
Dell is struggling through a period in which it is trying to re-invent itself on a number of fronts - product design, customer service, and distribution. Meanwhile, EMC, the world's leading storage vendor, is flush with cash and has the opportunity to make a big move.
Because EMC operates at the top end of the enterprise market with mainframes and big Unix servers while Dell has a stronghold in the mid-level enterprise market with Windows and Linux servers, the combination of the two would create a powerful data center company.
The challenge may be that EMC has just become a key partner for Cisco in its new data center strategy, and EMC also has relationships with IBM. However, a closer relationship with either of those two would mean EMC playing second fiddle, but a merger with Dell could give EMC a much more visible leadership role in the data center market.
Other companies that could become acquisition targets in 2009:
- Sun Microsystems
- Juniper Networks
Jason Hiner has nothing to disclose. He doesn't hold investments in the technology companies he covers.
Jason Hiner is Global Editor in Chief of TechRepublic and Global Long Form Editor of ZDNet. He's co-author of the book, Follow the Geeks.