Which is More Difficult: A Marriage or a Corporate Acquisition?

My nephew recently attended a wedding and later commented that the bride and groom were totally incompatible and that he expected that the marriage would soon dissolve. His comments don’t seem entirely unwarranted. Given that half of the marriages in the US end in divorce, if you attend two weddings you can expect that one of them will not last.

Corporate acquisitions are about as likely as a marriage to be successful. With that in mind, it is interesting to look at the two acquisitions that were announced earlier this week and speculate as to whether or not they will be successful. One of those acquisitions, Avaya’s acquisition of Nortel’s Enterprise Solutions Business unit, was long expected. Avaya spent nine hundred million dollars for Nortel and set aside another fifteen million dollars for employee retention. Avaya is owned by private equity firm Silver Lake. Silver Lake executive Charlie Giancarlo, ex-of Cisco, is responsible for Avaya. While it is difficult to know what Giancarlo and Kevin Kennedy, CEO of Avaya have in mind, it is possible to make some intelligent guesses. Giancarlo knows the LAN switching business intimately. He could be interested in resurrecting Nortel’s LAN switching product line and trying to take market share away from Cisco. However, I doubt that is what he has in mind. This acquisition looks to me like Avaya is buying the Nortel customer base and if that is the case, Avaya will not face the tough challenge of product integration. Avaya will try to find a way to get at least some value out of the Nortel product set that it acquired while they focus primarily on the task of migrating the Nortel customer base over to Avaya. Given that Avaya has a seasoned management team, it is likely that Avaya will transition most of the Nortel customers and end up getting a good return on their investment. As such, this marriage (make that this acquisition) should be successful.

The CA acquisition of NetQoS came together relatively quickly. CA paid two hundred million dollars for NetQoS – roughly four to five times earnings. In 2009 that is a big multiple and indicates that CA clearly values NetQoS. There is reason to hope that this marriage can work. CA is a very different company than it was just a few years ago when it was known as Computer Associates. The CA infrastructure management group has brought in some very skilled executives (i.e., Roger Pilc, Bill Ahlstrom) and CA has made some key acquisitions; i.e., Wiley. When the new CA acquires a company, it tends to give it a fair degree of autonomy – at least for a while. That being said, Pilc will definitely want to integrate NetQoS products into the rest of his portfolio. That process always tends to take some of the momentum away from the acquired company. Perhaps the strongest threat to this marriage is that CA looses too many key NetQoS personnel if it makes the mistake of forcing a big company culture down the throats of a fast-moving small company.  Still, this marriage should work out.

UCS – Brilliant Move or Blunder?

I spent last week in the San Jose area. Outside of the discussion of whether Avaya or Siemens would acquire Nortel, the next hottest topic was Cisco’s UCS. Some of the conversations were around the technology, but more of the conversations were about how the announcement of UCS will dramatically alter the marketplace. In particular, there was a lot of discussion about what Cisco’s movement into servers means for Cisco’s relationship with HP and IBM.

To put all of this into context, roughly two years ago I was among a small group of analysts who were having lunch with John Chambers. As ever, Chambers was peppering the room with questions. One of the questions he asked us two years ago was if we thought that three years into the future that Cisco would still be a close partner with HP, IBM and EMC. His question clearly portended Cisco’s movement into servers. Based on what I now know, I feel quite confident that a year from now Cisco will not be a close partner with HP and IBM.

There is a line of thought that says that they only way that the elastic provisioning of IT resources (a.k.a., cloud computing) will ever work is if the environment is homogeneous. This line of thought argues that even minor differences in the IT infrastructure greatly increase the difficulty of achieving the goals of cloud computing. If Cisco truly buys into this line of thought, then they could argue that they had to move into the server market just as some of the major players in the server market will have to move into the networking market.

However, there is another line of thought that says that Cisco is a big company and the only way that a big company can grow substantially is to enter other big markets. That is a reasonable business strategy, but like all business strategies it comes with risk. In this case, part of the risk is how will the major players in the server market respond? The story that I heard is that when Cisco told HP of their plans to enter the server market, they were walked to the door. I don’t know if that story is true, but I doubt if HP’s reaction was to embrace Cisco, give them the secret handshake and welcome them to the club. I also doubt if IBM was terribly amused. So what is Cisco’s upside as it enters the server market? The good news is that the server market is indeed sizable. The bad news is that it is characterized by a number of large, established players and relatively small margins.  

Cisco’s switch and router business brings in over twenty-five billion dollars a year in revenue and is characterized by extremely high margins. Cisco does have some competitors in the enterprise router market, but none of them have found a way to gain double-digit market share. There is a line of thought that says that Cisco is putting this cash cow at significant risk in order to enter a low margin market.  

Probably nothing dramatic will happen in the market in the near term. The rumors that IBM was going to buy Juniper Networks have calmed down, at least for now. HP already has a networking business, but I doubt if Cisco takes it very seriously. That could certainly change if HP started to gain market share. One of the key issues that will get played out over the next year or two is “Is it easier for a network company to do servers than it is for a server company to do networking?” Part of that issue is technical. A bigger part, however, is account centric. For example, who has more control over the customer – Cisco or IBM?