Consolidation Crazed

I love watching markets, because they are at times very predictable (which doesn’t explain why I lost my shirt investing in alpaca futures back in the 1990’s).

Presently we witness market consolidation in various technology sectors. IBM, Oracle and SAP are pillaging every available Business Intelligence (BI) vendor who survived the initial market shake-out. And Mark Hurd, HP’s chief, is predicting an ongoing slew of mergers and acquisitions as part of a broader technology market consolidation. Even my broker thinks the technology market is ripe for thinning the flock (let’s hope his predictions about tech are better than those llama fleece demand).

At the risk of repeating myself yet again, all markets consolidate over time. When first invented there were dozen of telephone companies, and eventually there were but a few. When cellular phones were whelped, there were a dozen domestic carriers, and they have merged and purged down to a handful. Same for automobiles — have your heard from Packard, Edsel, or Stanley Steamer of late? Thankfully llamas merge from time to time and create more woolly clothing factories.

Consolidation applies to technologies, and for many of the same reasons reasons. What motivates monster’s like Oracle, HP, IBM and SAP to buy companies can be distilled to several common factors:

Market maturity: When a market matures, it means there is less innovation and risk. Products tend to homogenize. Thus the risk of entering a market drops, making acquisitions safer. Since a technology company needs to create a whole product set for their customers, waiting for market maturity helps the acquiring company to buy instead of build, and to buy when the risk of utter failure is reduced.

Competitive threat/advantage: When a competitor has technology that completes their whole product set, you may be forced into buying similar technology.

Lack of market entry/options for partnering: To provide technology as a product/service, you can either buy (acquire/merge), build or partner. But when a market matures, partnership opportunities decrease. If the cost or time to build is large, and no partnerships are available, then acquisition is the only alternative.

The BI market over which SAP, Oracle and IBM went nuts is a case study. Despite recent Open Source BI entries, the market had anointed three front runners (my casual observations and some old research from General Electric indicate that every market can support no more than three gorillas). Thus, the BI market was mature. With all three of the pan-tech players competing to add value at the application level, and none having significant BI products of their own, a buying spree was bound to happen. It was more predictable than a sheered llama.

So if you are investing or merely predicting markets for the fun of it, watch for those signals:

  • Demand by customers for single vendor solution sets
  • Mature markets that multi-discipline gorillas do not have
  • Competitive threats/advantages by rapidly acquiring technology.

When these conditions are met, companies will merge faster than two naked llama.


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