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January 22, 2016updated 31 Aug 2016 9:42am

Falling share prices give tech giants a chance to buy cloud rivals

Analysis: The need to diversify their portfolios may see the likes of IBM, HPE and Cisco busy with acquisitions.

By James Nunns

A testing month for technology giants could actually end up being beneficial to them in the long run.

Companies like IBM have seen their revenues fall and are struggling to re-invent themselves to overcome the challenge of technology upstarts that have eaten into their market share – but all may not be lost.

A route out of this could be through acquisitions, more specifically the acquisition of those younger more agile companies that have been causing them all sorts of trouble.

The reason why the established tech giants could be in the position to do this is because they aren’t the only ones that are being hit by the downward sliding market, the upstarts are being hit as well and they have a lot less cash to deal with it.

Take Box for example, although it has seen a recent upturn in share-price, since the 22nd of December its price has dropped by 26%. Workday is another example, the company sells online access to accounting and HR software and lost 13% of its share price over the same period.

The difference as I mentioned is the reserves of cash that say an IBM has compared to a Workday, IBM has around $7.7 billion in cash, HPE $10.1 billion and Cisco has nearly $60bn. By comparison Box has cash and cash equivalents of around $165 million, a vast difference compared to the established players.

The idea is that a company like IBM could theoretically buy a company like Box for a lot cheaper a price now than perhaps ever before.

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In addition to the benefit of getting them on the cheap (relatively speaking) the established player removes the threat to their business, helps them deliver new products, combines the two companies expertise and gives an injection of innovation if needed.

Large companies’ buying smaller ones isn’t anything new, for example IBM just acquired Ustream for $130 million.

The company is a cloud-based live video streaming service provider that will enable IBM’s corporate clients to share live video streaming across a number of industries.

The opportunity for IBM is that it can tap into the cloud-based video services and software market that is estimated to be worth around $105bn.

IBM Cloud Video Services, GM, Braxton Jarratt said: "Through this latest acquisition and the creation of a new cloud business unit, IBM will provide an end-to-end suite of digital video solutions for the first time under one roof.

"As a result, clients will be able to take advantage of every stage of the video life cycle through advances in customisation, digital access, visual analytics and more, all to enable the consistent delivery of video content globally."

IBM isn’t alone here, you often see established players such as the likes of Oracle buying smaller companies as they look to integrate them into their own products and services and improve their own offering.

You could probably look around at most of the major vendors and match them with promising companies in their sector, but there are problems with this and it could breach EU antitrust regulations if the company is too active in a single market.

This has been seen in the big data market where concerns have been raised about a monopoly of data. The EU Commissioner for Competition, Margrethe Vestager, recently said: "If a company’s use of data is so bad for competition that it outweighs the benefits, we may have to step in to restore a level playing field."

Article 101 and Article 102 of the Treaty on the Functioning of the European Union set out how the EU monitors competition.

In Article 101 it’s laid out that no agreement between two or more independent market operators can be made which restricts competition, while Article 102 prohibits firms that hold a dominant position in a market to abuse that position.

So basically you can’t just go around and snap up your competition so that you have a monopoly on the market. Although, if you look at deals such as BT acquiring EE then it could be argued, and has been by competitors, that this gives the buying company far too strong a position.

This is for the Competition and Markets Authority to decide and in the case of the BT and EE deal it found no issue and so it was cleared.

The deal then combines the UK’s largest fixed telecoms company with its largest mobile operator. The point being that it can be approved by the regulator.

Another option for companies is to try and ride it out, work on improving themselves internally and invest those cash reserves into R&D without acquiring. The question is do you spend to get yourself out of trouble or save?

While software and hardware spending estimates drop you can see some companies buying in more expertise to specialise in one area of technology, while others are diversifying their portfolio, also through acquisitions.

 

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