m&a concepts applied to the technology sector | march 20, 20131 field study mergers &...

M&A concepts applied to the technology sector | March 20, 2013 1

Field Study

Mergers & Acquisitions concepts applied to the technology sector

March 20, 2013


1. Introduction

2. Concepts

3. Case: Oracle Sun

4. Drivers for M&A in the technology sector

5. Case introduction: Google Motorola


Introduction M&A types

Adapted from M&A Part I

• Industrial

• Vertical

• Horizontal

• Size, market power

• Diversity, product range, cross selling

•Financial

• P/E

• leveraging – diversification

•Market power : intended, not announced

• Size: production efficiency

• Purchasing power

• Production economies of scale

• Barrier to entry – minimum size – technology ?

• Efficiency – flexibility

• Outsourcing - offshoring

• Size: distribution efficiency

• Marketing power

• Production economies of scope

• Replicating sales and marketing processes to new products / new markets

•Absorb suppliers, absorb transformers, absorb distributors, “capturing the value chain”

•Security of supplies, of outlet.

• Importance of make-or-buy decision. Opportunity costing

•Own your real estate airplanes, ships, …?

•Own your suppliers, distributors What are core suppliers, distributors?

M&A types Vertical Horizontal


IntroductionScope

• In scope Industrial M&A in the technology sector

• Out of scope Financial M&A and conglomeration or acquisitions that build or optimize the parent compan

y’s portfolio of businesses Market power and competition issues


IntroductionKey messages

• When a CEO wants to boost corporate performance or jump-start long-term growth, the thought of acquiring another company can be extraordinarily seductive

• Indeed, companies spend more than $2 trillion on acquisitions every year

• Yet study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%.

• Companies too often pay the wrong price and integrate the acquisition in the wrong way

• The success or failure of an acquisition lies in the nuts and bolts of integration.

The New M&A Playbook, C. Christensen, R. Alton, C. Rising, and A. Waldeck, HBR, March 2011


1. Introduction

2. Concepts

3. Case: Oracle Sun




ConceptsFocus on acquisition integration with the article: The New M&A Playbook, C. Christensen, R. Alton, C. Rising, and A. Waldeck, HBR, March 2011

M&A goals

Leverage My

Business Model

Reinvent My

Business Model

Command Higher Prices

Lower Cost

To improve a product or service that’s still developing, one whose customers

are willing to pay for better functionality.

The parent plugs certain resources from the acquisition into its existing

model, jettisoning the rest of the acquired model and shutting down,

laying off, or selling redundant resources.

Acquire Disruptive Business

Model

Acquiring to Decommotize

The most reliable sources of unexpected growth in revenues and margins are disruptive products and

business models.

One of the most effective ways to use RBM acquisitions is as a defense

against commoditization.

Low Price

High Price



ConceptsRBM example: Oracle Sun

RBM

Acquire Disruptive

Business Model


• Disruptive companies are those whose initial products are simpler and more affordable than the established players’ offerings.

• They secure their foothold in the low end of the market and then move to higher-performance, higher-margin products, market, tier by market tier.

• If a firm finds itself being commoditized in this way, acquisitions won’t improve the output of its profit formula

• Firms in this situation should instead migrate to “where the profits will be”—the point in the value chain that will capture the best margins in the future.

Migrate to “where the profits will be”

Cloud Computing

Oracle Exalogic and Exadata

Salesforce.com’s new multi-year contract

enables them to continue building virtually all of their

cloud services on



ConceptsKey questionWhat elements of the business model will change?

• Customer value proposition Offering that helps customers do an important job more effectively, conveniently, or

affordably than the alternatives.

• Profit formula Revenue model Cost structure

• Resources Employees, customers, technology, products, facilities, and cash

• Processes Manufacturing, R&D, budgeting, and sales.



1. Introduction

2. Concepts

3. Case: Oracle Sun




Case Oracle Sun

1. Oracle

2. Oracle acquisition strategy

3. Sun deal

4. Implementation highlights Role of the banker Role of the consultant Communication Stakeholder management Branding Advertizing Management

5. Legal and regulatory


1. OracleFounded in 1980, Oracle is the largest business software company in the world, with 345,000 customers - including 100 of the Fortune Global 100 - and supports these customers in more than 145 countries.

• Oracle business model is based on products and services:

Database products Middleware products Application products

• Logistics• Financials• HR• CRM• Business Intelligence

Consulting services for all products

• Oracle main competitors are: IBM for database and middleware software SAP for application software Microsoft for database, middleware and business

software

• Sun is at the same time: A competitor of Oracle in the database market, with

MySql A competitor of IBM in the Unix server market A key enabler for Oracle and IBM with the Java plate-

form, in the middleware market

• Oracle’s strategy is based on three differentiation levers:

Technology products Business application products Open standard products

• This translates into frontal competition with Microsoft, SAP and IBM

(1) Technology (2) Applications

(3) Open Standards

Microsoft

IBM SAP

Oracle = (1) + (2) + (3)

Oracle


1. OracleOracle stock outperforms market and peers

Source: FT

Oracle stock outperforms NASDAQ, S&P 500, DOW

Oracle stock outperforms SAP, Microsoft, IBM and CISCO

Only Google, Amazon and Apple stocks are doing better


1. OracleImpressive margins, cash rich, and levered, unlike other software companies

Source: FT

AAPL net income = 8.24bn, Google net income = 6.52bn, Amazon net income = 902.00m, Oracle net income = 5.59bn, Microsoft net income = 14.57bn, SAP net income = 1.79bn, IBM net income = 13.43bn, DELL gross margin = 18%, IBM gross margin = 45%, SUN gross margin = 45%


2 Oracle acquisition strategyPrinciples

Source: http://www.cio.com/article/print/195950

• Oracle brazenly acknowledges that it creates innovation and innovative products by buying them from others. This thinking, of course, is at odds with the long-held and romanticized view of innovation in Silicon Valley

• "It's crazy to say you will only grow through innovation," said Oracle CEO Larry Ellison a couple of weeks ago in a New York Times article. "It's bizarre that there's a stigma to buying something rather than building it yourself."


3. Sun deal Acquisition strategy rationale (BEFORE)

• Oracle to acquire Sun Microsystems (“Sun”) Purchase price of $9.50 per share in cash Approximately $7.4 billion in equity value; $5.6 billion net of cash and debt Transaction closed in January 2010

• About Sun Leading provider of standards-based computing infrastructure, including enterprise

computing systems, software and storage Headquartered in Santa Clara, CA 30,000 employees worldwide, 47,000 enterprise customers worldwide

• Industry transforming acquisition Combines best-in-class enterprise software and mission-critical computing systems Expected to deliver an integrated system, from applications to disk, optimized for higher

performance, improved reliability and enhanced security Customers expected to benefit from decreased systems integration costs, and improved

performance, reliability, and security

Source: Oracle Web Site


3. Sun deal Acquisition strategy rationale (BEFORE)

The Most Complete and Open Enterprise Technology Stack

Open and standards-based Optimized, integrated and extensible Higher performance, improved reliability and

enhanced security Shorter deployment times Easier to manage and upgrade Lower cost of ownership Reduced change management risk Integrated support


New products


3. Sun deal Acquisition strategy rationale (AFTER)

• Customer value proposition: Exalogic / Exadata Radically simplify the integration between software and hardware

• Profit formula: applying Oracle operating margin (45%) to Sun Premium pricing vs open source pricing Leaner cost structure

• Resources: more investment in innovation and R&D Development of employees, customers, technology, products, facilities, and cash

• Processes: alignment and optimization Optimizing sales (direct sales, strict control of Value Added Resellers), streamlining user

support, integrated marketing, shared R&D, integrated back offices

2011 2010

Hardware Systems Revenues $7,092 M $2,418 M +193%


4. Implementation highlightsRole of the banker

Charles E. Phillips is President of Oracle Corporation and a member of the Board of Directors.

He joined Oracle in 2003. Before joining Oracle, Mr. Phillips was with Morgan Stanley, a global investment bank.

“Phillips (alongside Goldman Sachs' Rick Sherlund) had been widely regarded as the most influential software analyst on the sell-side and a major advocate for software M&A; particularly after the bubble burst and the industry began a maturation phase”, http://woodrow.typepad.com

Safra A. Catz has been President of Oracle Corporation since January 2004 and a member of the Board of Directors since October 2001.

She served as Oracle’s Chief Financial Officer from November 2005 to September 2008, as Executive Vice President from November 1999 to January 2004, and as Senior Vice President from April 1999 to October 1999.

In May 2008, Ms. Catz was also appointed to a three-year term as member of the board of directors for HSBC Holdings plc, one of the world's largest banking and financial services organizations.

Phillips and Catz are Larry Ellison’s arms with regards to M&A strategy and implementation. Phillips identifies the targets. Catz monitors the implementation and the value creation.



4. Implementation highlightsRole of the consultant

Some lessons learned, Doug Kehring, an Oracle SVP for corporate development

• For one, it doesn’t work with bankers - it has a bank in house. Oracle, doesn’t use bankers, not even for the contentious, $8.5 billion acquisition of BEA Systems Inc. in January. Instead it relies on co-presidents Chuck Phillips and Safra Katz, backed up by Kehring and a 16-person strategy and corp dev team. Chairman Larry Ellison has also been known to weigh in from time to time.

• Oracle is similarly self-reliant on integration, trying a big consulting firm on the 2005 PeopleSoft integration but deciding to do things itself instead. Kehring says speed is paramount in Oracle’s integrations, and that targets immediately adopt Oracle’s back-office policies. “We’re buying the go-to-market part of the business,” he said.

• Kehring also talked about the importance of communicating about deals in the media, a lesson that Microsoft is learning now. He noted that Microsoft has had different executives saying different things.

Oracle is relentlessly focused - on strategy, on integration, on message.

Source: http://industry.bnet.com/technology/100015/Oracle Speaks on M&A, Is Microsoft Listening?


4. Implementation highlights Communication: centralized, structured, focused www.oracle.com/sun



4. Implementation highlightsStakeholder management: what’s in it for me?


4. Implementation highlightsBranding


4. Implementation highlightsAdvertising


4. Implementation highlightsManagement

Mark Hurd is President of Oracle Corporation and a member of the company's Board of Directors. He joined Oracle in 2010. As President, Mr. Hurd oversees the corporate direction and strategy for Oracle's global field operations, including marketing, sales, consulting, alliances and channels, and support. He focuses on strategy, leadership, innovation, and customers.

Before joining Oracle, Mr. Hurd served as Chairman of the Board, Chief Executive Officer, and President of HP, where his focus on customers, innovation, improved operational efficiency and execution led to significant

company growth.

Mark Hurd, former CEO of HP has replaced Charles E. Phillips as President


Safra A. Catz has been President of Oracle Corporation since January 2004 and a member of the Board of Directors since October 2001.

She served as Oracle’s Chief Financial Officer from November 2005 to September 2008, as Executive Vice President from November 1999 to January 2004, and as Senior Vice President from April 1999 to October 1999.

In May 2008, Ms. Catz was also appointed to a three-year term as member of the board of directors for HSBC Holdings plc, one of the world's largest banking and financial services organizations.

http://www.oracle.com/us/corporate/press/Executives/mark-hurd-522642.zip

5. Legal and regulatoryAnything Europe could say about the deal?

EU Commission•The acquisition of Sun Microsystems by Oracle Corporation was completed by Oracle on January 27, 2010. Significantly, Oracle, previously only a software vendor, now owned both hardware and software product lines from Sun (e.g. SPARCstations and Java, respectively).•A major issue of the purchase was the fact that Sun was a major competitor to Oracle, raising many concerns among antitrust regulators, open source advocates, customers, and employees. The EU Commission delayed the acquisition for several months over concerns of Oracle's plans for MySQL, Sun's competitor to the Oracle Database. The commission finally approved the takeover, apparently pressured by the U.S. to do so, according to a Wikileaks cable released in September 2011.•Source: Wikipedia

Oracle Android Lawsuit

•Oracle filed a patent infringement lawsuit against Google over its use of Java in the Android platform. Android apps run in the Dalvik Java virtual machine. The apps are written in Java but are compiled into Dalvik's custom bytecode format which is incompatible with standard Java runtime environments. Google thus avoided licensing fees associated with J2ME, the mobile version of Java. However, aspects of the Dalvik system are very similar to the Java technology patented by Sun and now Oracle.

•The court found that Oracle's primary copyright claim, based on the Java Application Programming Interface (API), failed because the portions Google reused were not copyrightable. Google was found liable for a small amount of literal code copying. Oracle will be limited to statutory damages for these claims. The jury found that Google did not infringe Oracle's patents. Oracle has said they will appeal.

•Regardless of the legal merits, commentators have questioned the wisdom of the lawsuit over Android, a platform which has reinvigorated the Java community. In addition, it gave another worrying signal to open source community members

•Source Wikipedia



1. Introduction

2. Concepts

3. Case: Oracle Sun




Drivers for M&A in the technology sectorVertical and horizontal integration context

Consumers Enterprises Revenue Margin Profit

ServicesGoogle, Amazon,

AppleIBM, HP

SoftwareMicrosoft,

Apple, Google

IBM, Oracle, SAP,

Microsoft, HP

Hardware Apple, HPIBM, Oracle,

HP

Vertical and horizontal integration strategies

Have impacts on revenues, margins and profit

IBM and vertical integration in the eighties, Microsoft and horizontal integration in the nineties, Apple and vertical integration today. Who’s next?


Drivers for M&A in the technology sectorManufacturing and Intellectual Property (IP) pay off

16 business models Differentiated returns

Temptation for the Manufacturer / Innovator (investing above their industry average in R&D like AAPL) and IP Landlord (like MSFT) models is great

The Business Models investors prefer, P. Weill, T. Malone, T. Apel, Center for Information Systems Research, Research Brief, November 2011

% of revenue by asset type and asset right


1. Introduction

2. Concepts

3. Case: Oracle Sun




Google Motorola Analysis framework: M&A goal

M&A goals

Leverage My

Business Model

Reinvent My

Business Model

Command Higher Prices

Lower Cost

To improve a product or service that’s still developing, one whose customers

are willing to pay for better functionality.

The parent plugs certain resources from the acquisition into its existing

model, jettisoning the rest of the acquired model and shutting down,

laying off, or selling redundant resources.

Acquire Disruptive Business

Model


The most reliable sources of unexpected growth in revenues and margins are disruptive products and

business models.

One of the most effective ways to use RBM acquisitions is as a defense

against commoditization.

Low Price

High Price



Google Motorola Analysis framework: what elements of Motorola will Google change?

• Why doing the deal Drivers Price

• What elements of the business model will change Customer value proposition: an offering that helps customers do an important job more

effectively, conveniently, or affordably than the alternatives. Profit formula: revenue model and a cost structure Resources—such as employees, customers, technology, products, facilities, and cash Processes such as manufacturing, R&D, budgeting, and sales.

• How, who, when? Features of the implementation plan


Google MotorolaBy Richard Waters, Financial Times

Vertical success requires more than just a Motorola

“Verticalisation” is an ungainly word for what has become a highly fashionable trend in the tech world. With Google slapping down $12.5bn in cash this week to buy Motorola Mobility, the idea just received another big boost. But like many business fashions, there is a risk that this one is about to become an uncontrollable bandwagon – with unhappy consequences.

Until recently, the idea that the best products come from companies that combine both hardware and software expertise under the same roof went against the grain of accepted thinking in technology. The PC era was built on a horizontal model, with different companies supplying everything from the chips to hardware and operating system. That was itself a reversal of an earlier computing era dominated by IBM’s integrated mainframe computers.

It took Apple to bring things back to the future. With the iPhone – and now the iPad – it has gone even further, building out its own chain of retail stores and, through the App Store, corralling the services that breathe life into its devices. With a move into chip design, it has even taken control of the most important component in its hardware.

Google’s hardware hire must move fast to catch Apple

Why would an internet company hire someone who has played a key role in the world’s most impressive hardware supply chain?

The response to that question could also provide an answer to one of the more intriguing questions hanging over some of the leading software and internet concerns: are they preparing a deeper push into the hardware business? If so, their business models and margin profiles could be in for a drastic change.

By Richard Waters, Financial Times

m&a concepts applied to the technology sector | march 20, 20131 field study mergers &...

Documents

ma concepts

technology sector

ma goals

introduction ma types

scope financial ma

scope industrial ma

new ma playbook

introduction scope