<%@ LANGUAGE=VBScript %> <% Set asplObj=Server.CreateObject("ASPL.Login") asplObj.Protect Set asplObj=Nothing %> Analysis of Dell-Perot, Xerox-ACS mergers (Sep 30)

Annex Bulletin 2009-16                            September 30, 2009

A partially OPEN edition

Recent...

 

Tempest in a Tea Pot (Analysis of latest IT services industry M&A's)

 

Less Than Meets the Eye - Analysis of HP's 3QFY09 results

EDITORIAL COMMENT

 

Updated 9/30/09, 9:00PM HIT

Analysis of Latest IT Services Mergers & Acquisitions

Tempest in a Teapot

A 20-year Old Trend Is Still Alive and Well: Reaching the IT Summit Requires Strong Services

HAIKU, Maui, Sep 30 Were it not for the Austin-based Dell, it would seem as if Texas-based IT services companies are fleeing the home turf.   HP grabbed EDS last year.  Dell gobbled up Perot Systems a week or so ago.  And now, Xerox has also snatched up ACS (Affiliated Computer Systems), leaving Texas, the birthplace of the IT services business, without any such major independent companies.

So what's happening?  Has the return of the Big W (George W. Bush) to Texas scared all the local chickens into running for protection from the mighty out-of-state roosters?  Or was it the "big bad Obama" threatening to nationalize health care forced them to seek shelter in the bowels of bigger enterprises, better connected to the Washington power brokers?

Actually, it is neither.  What is happening is a continuation of an old trend that's been with us for almost 20 years.  Dubbed "Industry Stratification & Globalization" when we first identified it in March 1990, we foresaw this trend shaking out the old IT establishment and create a New World Order in the computer industry, with global IT services companies perched atop the industry's food chain (see "Industry Stratification Trend", Mar 1990).

Except for color and today's date stamp, what you are seeing above is an original chart from that March 1990 Annex Bulletin.  The global IT services integrators are depicted as "general contractors."  The original computer companies (both hardware and software, like Dell or Oracle) are relegated to the role of sub-contractors, while the technological foundries (like Intel, AMD or the Japanese vendors) slide down the food chain even further.

That has been pretty much the tune to which the IT industry has danced for the last two decades.  EDS-AT Kearney, Cap Gemini-Ernst & Young, IBM-PwCC were examples of some  earlier IT services dance card pairings.  So the HP-EDS, Dell-Perot, Xerox-ACS deals are merely new twists to an old rhythm.

What Is the Reason for These M&A's?

What's bringing this about?  From the buyer perspective, a desire to move up the food chain.  Which means expand the reach and range of their IT services capabilities.  That is why the predominantly hardware companies from yester years, such as HP, Dell or Xerox are now spending big bucks to beef up their services organizations and offerings.

From the target companies' viewpoint, the second part of the trend which we also identified back in 1990 - Globalization - is creating a need to partner with large companies in order to expand their reach and range.  And, therefore, grow.  They also need access to cheaper capital and technology.  And, therefore, boost their profits.

And then we also have the reverse moves... software providers trying to expand their reach and range by acquiring ailing hardware companies (such as Oracle's acquisition of Sun Micro earlier this year). 

So putting it all together - the good old Industry Stratification & Globalization trend is fueling all this churning that's taking place in the IT industry.  A global economic recession is merely the reason why the process is accelerating now, not why it is happening in the first place.

Now, EDS and Capgemini should be painfully aware, among other hopeful suitors, not all IT marriages are made in heaven.  Some lead to divorces.  Sometimes they occur quietly, below the radar screens of the industry watchdogs.  At other times, companies separate noisily (e.g., EDS and AT Kearney).  Each time, however, they are painful, whether or not the parties are willing to acknowledge that publicly.

What Can We Expect?

So what can we expect from the two latest mergers?  One senior industry insider that has been on both sides of several IT services fences opines that the Dell-Perot deal has better chances of success than the Xerox-ACS marriage.  The reason?  Vastly different cultures in the latter case. 

The ACS people will have a harder time adjusting to a Xerox culture, this source thought, while the Perot team will follow a strong leader, such as Dell's Steve Schuckenbrock (a former EDS worldwide sales leader who was bypassed for the top there, and then joined Dell in Jan 2008).

Meanwhile, the market is definitely more bullish about the targets' than about the buyers' futures in the above mergers (left chart).  While the Perot and ACS shares have soared since the announcements of the two acquisitions, the Dell and Xerox stocks have sagged.

An interesting by-product of our industry analysis is a conclusion that the IBM stock is again undervalued compared to its rivals' shares (middle chart).  It is more than a dichotomy or a mere coincidence when a company with the best business fundamentals in the industry ends up at the bottom of the stock market stack.  It is a sign of its sub-par investor relations performance.  For, investors trade on PERCEPTIONS not facts.  And their perceptions of the original Big Blue's standing in the industry are obviously still lagging behind that of its rivals.

Finally, it was also interesting to see that the company that has disappointed Wall Street for three quarters in a row now is still at the top of the 5-year chart (top right).  HP, now the largest company in the IT industry has seen its revenues and profits shrink.  Yet investors keep on not only applauding its performance, but are putting their money where they mouths are. 

Which means that HP is excelling at the very thing IBM is lacking - the investor relations savvy.

Summary & Outlook

Putting it all together, the IT universe is unfolding as it should.  IBM Global Services is still by far the largest global player in that industry segment.  And the two mergers that have created all the excitement in the last week or so won't even make it into our leaders' charts, not to our annual Global IT Services Octathlon (see the right chart and IBM Takes the "Gold", June 2009).  It would take a lot more ACS's for Xerox to qualify for it.  And it would take a lot more Perot-size bites for Dell to be invited to the table at which global bids are considered by the world's largest enterprises.

So the apparent current M&A frenzy is merely a tempest in a tea pot.  The only sure winners are the bankers who engineered these deals.  The bankers, like lawyers, always make out... whether or not marriages end up in heaven or in divorce courts.

Meanwhile, stand by for a more relevant indicator of the current state of health of the IT services industry, when Accenture reports its fiscal fourth quarter and final year-end results tomorrow.  We are not expecting a bed of roses nor a rosy outlook, except as compared to bleak results in the previous quarters this year.

Happy bargain hunting!

Bob Djurdjevic

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Volume XXIII, Annex Bulletin 2009-16
September 30, 2009

Bob Djurdjevic, Editor
e-mail: annex@djurdjevic.com

Tel/Fax: +1-602-824-8111

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