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When trying to understand the implications of a major event like Dell’s $67 billion buyout of EMC, sometimes it helps to look to the past before looking forward.
First, go back to IBM’s $3.52 billion acquisition of Lotus in 1995. At the time that was the most money ever paid for a software company. That seemed to set off a wave of tech mergers and acquisitions with some notable examples including Compaq’s buyout of legacy minicomputer maker Digital Equipment in 1998 and HP’s acquisition in turn of Compaq in 2001.
The pace of computer industry mergers have continued steadily to this day with the cost rising exponentially to match the market mega-billion dollar market capitalization of the buyout targets.
In fact, growth by acquisition has become a primary strategy among the old guard tech firms in the past decade. Oracle made four major multi-billion-dollar acquisitions between 2005 and 2009—PeopleSoft, Siebel, BEA and Sun—and lists 100 other acquisitions on its Website. EMC itself has 75 acquisitions to its credit. Check out this list of acquisitions made by Cisco the past 20 years.
We have seen this before and we have not seen the end of technology consolidation, and this may only be the “end of the beginning,” as Winston Churchill once said. Flash back to May 2014, when Cisco CEO John Chambers, speaking at the company’s annual IT summit said, “You’re going to see a brutal, brutal consolidation of the IT industry,” talking of a “musical chairs-like movement” over the next few years and predicting that many of the current players in high tech won’t exist 10 years from now.
The implications will indeed be brutal. As we have seen, many mega-acquisitions have accomplished very little in the way of innovation or benefits to customers or shareholders, and the jobs toll has been high. In September HP announced that it will lay off up to 30,000 employees, which is on top of the 55,000 layoffs HP announced last year. A good chunk of the job losses will come from those HP acquired from Electronic Data Systems in a $13.9 billion deal in 2008.
Based on this evidence, and the fact that Dell will have to do something to cut costs to meet its debt obligations, it’s inevitable that there will be many thousands of jobs lost due to the Dell-EMC deal, no matter how many times executives insist otherwise or tout “synergies” in the deal.
Who the buyers and the sellers will be in the coming wave of consolidation is not hard to figure out. Startups, aging veterans and a few of the remaining industry leaders will be gobbled up.
Dell, EMC Mega-Merger Extends Pace of Enterprise IT Consolidation
Intel, Cisco, IBM, Microsoft and Oracle, and now Dell, we presume, make up the center of gravity in the tech business. Everybody will fall into it eventually.
HP will remain at the center of the M&A story. HP was mentioned as a player in potential deals with Dell and EMC in the past. Its looming split into HP Inc. and Hewlett-Packard Enterprise took them out of the running for EMC this time, but after the split takes place Nov. 1, one or both will instantly become targets for acquisition or they will go looking for acquisition targets.
As has happened in other major industries, the number of major tech players will continue to shrink. There used to be more than a thousand automobile manufacturers in the U.S. How many are there now? We may see a day when there’s only the “Big Three or Four” enterprise IT companies left standing to dominate the IT market.
The irony of the current environment is that technology is better, stronger, faster, and can do more things than ever before. So why is tech spending declining? We can attribute much of the “blame” to Moore’s Law. The next generation of IT technology has always been twice as fast or has had twice the capacity for the same amount of money. That model is showing some cracks, which presents its own set of problems, but it has gotten us to where we are today.
Users, both consumer and corporate, have been the major beneficiaries of Moore’s Law, in terms of cost savings and increased productivity, but that too may be ending. Somehow consumer and enterprise customers will have to learn to extract more value out of technology without the benefit of falling prices and increased performance.
We are beginning to see some promise from deep learning, natural language processing and other forms of artificial intelligence, but it’s not clear when or where the real breakthroughs will happen and if they will be able to counter the current downward spiral. Buckle up.
Scot Petersen is a technology analyst at Ziff Brothers Investments, a private investment firm. Prior to joining Ziff Brothers, Scot was the editorial director, Business Applications & Architecture, at TechTarget. Before that, he was the director, Editorial Operations, at Ziff Davis Enterprise. While at Ziff Davis Media, he was a writer and editor at eWEEK. No investment advice is offered in his blog. All duties are disclaimed. Scot works for a private investment firm, which may at any time invest in companies whose products are discussed in this blog, and no disclosure of securities transactions will be made.