I read with interest an interview of Henning Kagermann, CEO of SAP in the FT. The recent decision to acquire Business Objects sent SAP's stock down 5%. At the same time, they communicated that they would not enter a bidding war with Oracle over BEA.
Stated reasons are 1/ they are not abandoning organic growth and 2/ they only buy stuff where they are not leaders.
The first part I completely understand. I believe however that SAP should not overreact to whatever the market is doing, especially where that movement may reflect momentum investing or news-driven investment rather than fundamentals.
The second part made me chuckle though, since when is SAP a "leader", or even very frankly, "a contender" in middleware? How good it is to be CEO and believe what your head of development tells you: "Ach, JA! kommandant Kagermann, our midelver iz kikaz, we rulez, JA!".
Henning, dearest, I don't suppose you will take a DJ's advice but take it from me "yur midelver iz kaakaa". BUY ANYTHING to replace Netweaver, anything! Seriously, nobody will ever notice and you will look like a hero.
When I was young, I was a Jedi.
I remember vividly, during my JBoss tenure, walking into a board meeting with a demand for David Skok (our lead investor from Matrix): "David, I want to LBO BEA". It was always funny because David, in true British style, would try to stay calm, polite, and look for a courteous way of saying: "Are you out of your fucking mind?"
Expecting that answer, I would then try a softer target, applying my 4 year olds' negotiating tactic: ask for the cake, hear no, then ask for a comparatively inoffensive piece of candy--hear yes. So I would say "David, come on, let's LBO Novell, then go take on Red Hat". He would roll his eyes, still remain polite, and argue that at our stage we had to show organic growth over acquisition growth. If that it is still true of SAP, imagine how true it was of 2005 JBoss.
With a third time is the charm approach, I would finally put my real option on the table "David! work with me here, let's go LBO IONA". He was against it, but allowed me to run the numbers on IONA with the bankers. And fuck it all, the numbers didn't make any sense whatsoever, even with cheap credit. I remained frustrated, JBoss was too small from a capital and valuation standpoint... I had to resign myself to a simple fact: in a consolidating world, JBoss would be the game, not the hunter.
Consolidate or be consolidated.
Oversize ambition set aside, consolidation is a balance sheet game. Consolidation in the software market has created mega-platforms peddled by mega-vendors. Let's look at the "players" and consider what I call the Red Hat option.
1/ The naturals
I do not see IBM going after BEA, a bidding war against Oracle is a money losing proposition although merging the two product lines would insure that IBM remains the leader. There is a cheaper alternative which delivers more bang: buy Red Hat. With JBoss replacing the dead and embarassing Geronimo efforts, IBM could really consolidate the middleware market. Also with the Linux lines coming under repetitive FUD threats by Microsoft on the patent front, you have a "two birds with one stone" effect. While BEAS delivers only middleware, RedHat delivers OS and MW. This would effectively protect the massive investment IBM has made in Linux and open source. Forget buying BEA, buy RedHat.
As much as I like SUN, I do not see them as having the balance sheet needed to play in this league nor the strategic inclination to do so. I could be entirely wrong. For Sun to buy BEA also would clash with its stated OSS direction. For that kind of money, again Red Hat is a more natural fit with both an OS and MW. Glassfish is a decent effort, but one that is doomed to fail due to its "too late" nature in installed base. JBoss has the installed base. SUN has the OS credibility with Solaris to hijack enterprise Linux leaving IBM with the unpalatable options of rolling its own distro, or buying Novell. It would also future-proof its OS lines. My money would go on IBM buying SUN at this point. But again, at the end of the day, Sun is a hardware company, despite noise to the contrary by pony-tail boy.
We already discussed SAP and they have already denied they were going to bid. This is clearly a company that would benefit from a stronger MW offering, I am not sure they would know what to do with an OS, but the problem there is one of "not-invented here" syndrome from the technical team.
2/ The potentials
Much ink and bits have flowed on the software ambitions of HP. I even have good friends that are bullish on this option. I don't know. I can see it, but I don't totally buy it. Maybe. HP plays in operations, by buying opsware and hardware and offering services they play to their core strength, which is monetizing operations. Development models are a different beast. They are more comfortable talking to operations guys than they are talking to developers. The memories of the botched Bluestone middleware acquisition probably are a still too recent there, as well as a cautionary tale on the downside of acquiring companies, without following through on integration and promised investment.
Clearly here is a company that has the market valuation that is inflated and should use it or leverage it. It also has the ambition to branch into OS and MW as well as the development models. RedHat is a more natural fit than BEA. This acquisition would be a transformative one for the company and would allow it to hook the customer at the development time and to monetize the runtime.
3/ The long shots
I have seen some coverage that Microsoft may come out of the woodwork and play in this game now. I am going to go out on a limb and say "never in a million years". But I would love nothing more than to be proven wrong.
Few people mention Google. They are largely unknown as they don't really play in this space. Yet, they do have the ambition to provide the operating system for web applications. Plus the money to do this is inconsequential in their case. Here again, Red Hat could prove a better option than a large proprietary model play. Low probability.
In short, I am not sure the market is playing a truly strong hand against Larry, I don't see a strong bidding war, Oracle is the only real bidder here. RedHat is a better, and potentially cheaper, option for many of the other players.