BMC: Hostile Takeover Defense and Mega Trend

Rob Enderle

BMC, one of the largest enterprise software companies in the world, just got a hostile takeover warning this week after Elliott Associates moved to take over its board and package the company for sale. BMC immediately adopted a poison pill, hostile takeover defense and moved to block the takeover. With only 5 percent and the rumor pushing BMC's valuation higher (making acquiring more stock significantly more expensive), coupled with the BMC board's move to block the attempt, success seems unlikely. However, the attempt also indicates that the industry is continuing down a consolidation/vertical integration path.


Realize that, historically, the pendulum of company organization tends to swing both ways and that while it currently is favoring integration, it will likely swing back to specialization in a few years.


The Last Cycle


The industrial revolution was defined by specialization at a mass level. Craftsmen who built entire products gave way to firms that specialized in components selling to companies that built solutions. We saw this reverse in technology where IBM initially became dominant and it built its own software and components, and wrapped them with its own software and services.


In the '80s, this fragmented and we saw the rise of specialty companies like Microsoft and Oracle on software and Dell and Compaq on hardware. Currently, HP and Dell are massively expanding their software capabilities, Apple is increasingly designing its components and companies like Samsung have highly integrated capabilities that start with fabrication capabilities and end with full solutions.


The Promise and Problem with Vertical Integration


The promise of vertical integration is end-to-end product design and the showcase company for the result currently is Apple. It tends to maintain the highest customer loyalty and customer satisfaction in its segment because it owns and controls the solution.


The problem with this approach is focus; as the solution gets more and more complex, the executive team is forced to manage an evermore complex set of distributed sites, increasingly varied skills, and balance vastly different resource needs. That complexity can create product bottlenecks, cause leadership erosions and unmanageable complexity.


By staying focused, a firm can often stay more current, be more easily managed and target a defined, smaller customer base more tightly. The poster child for this approach is EMC, which maintains the highest customer satisfaction and loyalty in its segment largely because it can closely define its customer needs and focus on them.


Mergers Done Right and Wrong


Now the big issue with regard to a company the size of BMC is that the vast majority of mergers at this scale fail and fail spectacularly. We just saw HP's acquisition of Palm explode catastrophically and this is compared to the very successful sequential mergers Dell has accomplished over the last several years. Dell's hard-learned process was to buy small companies that needed Dell's greater resources to reach sales targets and then largely leave them alone as near-independent divisions.


In a large scale, EMC has demonstrated this with both VMware and RSA. Intel with McAfee, however, in the larger instances when the acquired companies strengthened, the synergy between the buyer and the acquired company has been relatively minor. That is considerably better than large acquisitions like IBM's acquisition of ROLM or AT&T's acquisition of NCR. The first was a catastrophe that first damaged IBM and then Siemens (the firm that acquired and then killed ROLM along with most of its telecom business), and the second was instrumental in the collapse of the old AT&T (the current AT&T was built from the ashes of the old one).


So, to do an acquisition of BMC's scale right would require an arm's length relationship and while that might preserve BMC, it would result in little additional value to the purchasing company outside of being able to adjust senior management like BMC did with VMware and Intel did with McAfee. If the acquiring company does it wrong and slams BMC into its firm, it'll gain more potential synergy but the odds favor it killing BMC and possibly crippling itself in the process.


A far better path would be to create a virtual corporation like EMC did with Cisco, VMware and Intel with VCE. That approach has proven successful and none of the firms had to give up their own autonomy to get it done.


Wrapping Up: BMC Must Remain Independent


The mega trend that the BMC event showcases is one of consolidation. However, at BMC's scale the best practice was demonstrated by EMC with VCE and is one of close partnership. Second, be an owned but independent subsidiary like Intel demonstrated with McAfee. The absolute worst would be a sale followed by a merger, which would likely destroy the value in BMC and might take the acquiring company down in the process.


Finally, hostile acquisitions of software companies have always been catastrophic. The best practice was Oracle's acquisition of PeopleSoft where the intent was to destroy PeopleSoft and it was incredibly successful. BMC's rigorous defense against this move is well warranted and appears adequate because it rightly recognizes that its collective future is at stake.

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