The Trillion Endpoints Behind Today’s High-Tech M&A

Amid a flurry of breaking business news stories tracking isolated merger-and-acquisition events in the technology sector, the focus tends to be on the participants. But when you have an industry in which a number of large, high-profile companies are executing acquisition strategies, the crux of the matter very quickly moves past “just the facts…” reporting.

You want a broader sightline into what is driving these events. What future condition are these companies preparing for? And what can be surmised about the relative value of the different strategies involved?

At my shop, we believe the recent tech M&A frenzy is inextricably linked to the fundamentals of an impending data center crisis. This crisis stems from what we refer to as One Trillion Endpoints, which is an estimate of how many devices are going to be streaming data across the Internet by 2013. Primary Global Research finds that these devices will drive volatile and non-deterministic workloads that will ultimately overwhelm capability and capacity, resulting in an acute, worldwide data center crisis. [More on that here.]

Far from an impending doom theory, at PGR we are pretty sure we are seeing the leading edge of a broadbased technology upgrade that is gathering real momentum. Industries overcome crises. We fully expect the coming crisis will fuel the biggest potential market share opportunity the technology sector has ever seen and may not see again for another 20 years.

As recent news indicates, few enterprises in this sector will be successful as they are currently configured. Clearly, strategic, well executed M&A is key for an enterprise seeking to be among the successful. No one has the computing resources package to prevail in a world of 1 trillion endpoints. Modularity and scalability are the watch words. Building “burstable” capacity into the solution is a critical step.

HP vs. Cisco: Different strategies, same goal
Given this context, one can evaluate the different M&A strategies that are emerging from today’s industry leaders. Hewlett-Packard, for instance, typifies a straightforward, bottom-up approach; i.e., it identifies holes in its product line and looks for acquisitions to fill the gaps. HP understands that as the number of endpoints on the Internet increases, more data moves from the device to the cloud and, in turn, to back-end NAS or SAN systems. Hence, HP has purchased companies that provide interconnect technology, like 3COM, and thin-provisioned storage providers such as PAR.

The peril in HP’s approach is that it is piecemeal, lacking an integrated strategic solution that ties together the disparate components — storage, networking, virtualization, servers, etc.– that are required to adequately address the demands of a trillion endpoints on the Internet. To date, HP has not really articulated a unified vision or a plan for gluing the pieces together.

Cisco, on the other hand, appears to typify a “top down” approach, where it has defined a vision with which it hopes to evangelize and convert the industry — or a very large chunk of it. It’s ironic, too, since Cisco was once the king of acquirers. However, at this point, Cisco is apparently looking inward, focusing on an in-house, “home brewed” vision called Unified Computing System (UCS).

Cisco hopes that UCS, along with its Acadia coalition, will generate market traction as customers wrestle with the challenges of providing end-to-end solutions for increasingly demanding customers. PGR's research shows that customers are skeptical about the price points of Cisco’s products and its ability to move beyond traditional market niches.

Greater success could very well lie on a middle-path strategy that seeks to acquire a niche within the data center sector that is larger than individual product lines but smaller than an overarching, “catch-all” segment (à la Cisco UCS) and integrate it into a larger whole.

At this early stage, IBM appears to be taking this course in recent deals with Netezza and Blade Network Technology (BNT) announcements. In the Netezza example, IBM has gone after the business analytics niche, which spans multiple product categories, and it's purchased a fairly standalone product that is sold as an easy-to-integrate appliance.

In the case of BNT, IBM has entered the virtual fabric arena, which is a key building block in next-generation data centers and is also easy to incorporate into a wide range of end-to-end solution scenarios. Do not overlook the fact that IBM has adeptly maintained its relationship with Juniper, which tells me it's in less danger of overreaching than, say, Cisco.

Lastly, IBM's M&A approach underscores perhaps the most important aspect of what being successful will be about: Namely, traditional boundary lines or distinctions between technology providers are blurring. The winners in the space are moving from narrow category definitions like “hardware”, “software,” or “services” and into being genuine (no more lip service) “solution” providers.

4 comments on “The Trillion Endpoints Behind Today’s High-Tech M&A

  1. Barbara Jorgensen
    October 5, 2010

    Hi Unni,

    Great summary and analysis of strategies–as always, collecting this kind of infomation and putting it in one place helps those of us focused on the supply chain see the big picture.

    I wonder if there is any indication of how these companies plan to execute their their supply chain strategies. By this, I mean two things: first, choosing and purchasing the components that go in to developing and building the hardware contained in these solutions. These companies are some of the biggest OEMs in the industry. Sometimes they consolidate their purchasing power following an acquisition, sometimes acquisitions operate independently. I'm wondering if if they've given any indication of either.

    The second aspect is their channel. Computer platforms and solutions are moving through distributors such as Arrow, Avnet, Ingram Micro and Tech Data and represent a huge opportunity for these distributors to target vertical markets with full solutions. Cisco just added Avnet to its reseller roster, in fact. What role will the channel play as these behemoth continue their M&A activity?

  2. bolaji ojo
    October 5, 2010

    The danger of data overload is an inevitable result of our push for the “connected-everything” society. When all electronic gadgets start accessing information and talking to each other over the web, it is possible our data servers will get overwhelmed. However, Unni is right. While some companies may see problems ahead, some farsighted executives probably see opportunities. Y2K at one point was a frightening prospect for many in the high-tech sector but many companies made a ton of money finding solutions to the problem. I believe HP's recent acquisition of 3Par represents one leg of the solution. How can other businesses, especially the ones involved in manufacturing equipment, component suppliers and their contractors benefit from the likely boom in data solutions?

  3. Hawk
    October 6, 2010

    There's always a winner and a loser when things start shaking out like this in the economy. Some companies will benefit from being well positioned and others will just simply disappeared because they didn't anticipate the change. Component suppliers who can track situations like this may be able to get engaged with OEMs expanding into the data-storage and management business. There's potential for danger for other companies, however. If investors find a manufacturer or supplier into the sector was not prepared to match rising demand for its products, they will express their displeasure by driving down the stock price. I wonder though, if a company can really truly tell where a particular market is headed. For instance, are we really sure enough connected devices will be sold to create the opportunities Unni identified here? What if you develop the product and processes to service the sector and the expected demand failed to materialize?

  4. Tam Harbert
    October 6, 2010

    Will there be enough capacity on the network itself to handle all this traffic? I'm wondering if we have enough fiber optics lines and wireless spectrum to handle all of this . . . .

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