To consolidate or not to consolidate

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

a/IBM
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.

b/SUN
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.

c/SAP
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

d/ HP
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.

e/ VMWare
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

f/Microsoft.
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.

g/ Google
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.

Comments

Unknown said…
What about Interface21? Do you think they'll get bought out?

p.s. I hate websites that think they're cleverer than I am. For example, blogspot who (whenever I clear my cookies) thinks that because I live in Switzerland, I can read German or Swiss German!
adt43wt342 said…
Probably.

I think their natural model is a large consultancy, these do no tend to get bought out (except by other consultancies) but do yield fantastic cash flows for their owners, the partners.

However they have now taken Peter Fenton on board (a VC that was part of JBoss's cap table) so they will be looking for product multiples and a corresponding exit. In the case of I21 it feels like a square peg in a round hole, I mean the hole "product" approach as opposed to consultancy. The time of the exit will depend on how successful they are at finding a product angle here.
muelli said…
I wouldn't buy IONA either. Not in the past and not in the future. I don't see any value in that company except serving as a nursing home for Apache committers. They are so boring.
Sacha Labourey said…
Recurring (CORBA) revenues are not boring at all :)
adt43wt342 said…
1/ I didn't know Apache committers went to IONA, I thought they went to JBoss@Red Hat.

2/ Right, not boring at all, boring is the new hip in this consolidating world. I like boring.
Juha Lindfors said…
Your German accent is most convincing :-D
adt43wt342 said…
JA! zat is vy galder got confuzed.
adt43wt342 said…
JUha here is where I got my inspiration from (email of another fin friend :)

Ze germans: English in Europe

The European Comission has just announced an agreement whereby English will be the official language of the European Union rather than German, which was the other possibility.

As part of the negotiations, the British Government conceded that English spelling had some room for improvement and has accepted a
5- year phase-in plan that would become known as 'Euro-English.'

In the first year, 's' will replace the soft 'c'. Sertainly, this will make the sivil servants jump with joy.

The hard 'c' will be dropped in favour of 'k'. This should klear up konfusion, and keyboards kan have one less letter.

There will be growing publik enthusiasm in the sekond year, when the troublesome 'ph' will be replaced with 'f'. This will make words
like fotograf 20% shorter.

In the 3rd year, publik akseptanse of the new spelling kan be expekted to reach the stage where more komplikated changes are possible.

Governments will enkourage the removal of double letters which have always ben a deterent to akurate speling.

Also, al wil agre that the horibl mes of the silent 'e' in the languag is disgrasful and it should go away.

By the 4th yer people wil be reseptiv to steps such as replasing 'th' with 'z' and 'w'with 'v'.

During ze fifz yer, ze unesesary 'o' kan be dropd from vords kontaining 'ou' and after ziz fifz yer, ve vil hav a reil sensi bl riten styl.

Zer vil be no mor trubl or difikultis and evrivun vil find it ezi tu understand ech oza. Ze drem of a united urop vil finali kum tru.

Und efter ze fifz yer, ve vil al be speking German like zey vunted in ze forst plas.
Margaret Rouse said…
Pony tail boy. I love it. I'll never read his blog again without thinking "I wonder what pony-tail boy is up to these days?"
adt43wt342 said…
He he, yes I used to chuckle at "My little pony" when FSJ would use it. You wonder why he still sports it, maybe he thinks he looks more "developer" like that? He has got some nerve to be walking around like that.
Unknown said…
vmware? Like in EMC^2? The company with 'solution suites' for SAP, Oracle, Microsoft?
Juha Lindfors said…
Ahh, kant vet until ze fif jer plan iz komplet.
adt43wt342 said…
Yeah, that EMC with $50B in market cap. Sacha thinks "they are the ones to watch", maybe.
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