By Krishna Roy
The technology industry has always been the subject of rumor mongering and the frenzied pace of M&A activity in recent years has only served to add new grist to the rumor mill. While takeover speculation can be conceived around idle theorizing based on heavy trading in a particular stock, elaborate extrapolations based on a throw away comment by a corporate executive or suppositions based on a company’s consistent under- performance, once in a while an industry watcher feels there’s sufficient to substantiate the rationale behind a potential acquisition to give it some level of credibility.
Gossip of a pending acquisition of market leading customer relationship management vendor, Siebel by IBM is the latest rumor to emerge from the analyst community. While many dismiss the idea as laughable, Forrester Research, one of the more outspoken and contentious industry pundits, believes the acquisition is imminent. Having missed the first boom of enterprise applications which came with ERP, IBM now wants to ride the coat tails of the hottest and fastest growing new breed of front office applications, it argues. Last month it published a report outlining the motivations behind such a transaction.
At face value, the very idea that Siebel would accede independence to a company with such an antithetical culture and ethos sounds preposterous. For a start, it is hard to see how IBM could accommodate the CRM vendor’s illustrious leader, Tom Siebel, and its equally dynamic management team, into IBM’s bureaucratic culture. And Big Blue would need Tom Siebel at the very least, since he is a CRM figurehead and the person who almost single-handedly transformed Siebel into the most dominant force in this market. Second, it would be equally difficult to imagine how Siebel would allow his company to disappear into IBM’s faceless autocratic structure, particular when such an acquisition would deny Siebel the market visibility it has worked hard to build, and moreover, take place at a time when Tom Siebel is currently winning a war of words with arch rival and ex- employer Larry Ellison in the Front Office space.
IBM is one of very few vendors with sufficient cash and equity to purchase a company with Siebel’s $3.4bn market capitalization and provide a premium that would make the move sufficiently enticing for Tom Siebel. Big Blue had cash and cash equivalents of $5.37bn for the year to December 31st 1998. Furthermore, unless Siebel put a poison pill in place, Tom Siebel would be duty bound in his role as CEO to consider the offer in deference to his primary objective to extract maximum value for Siebel shareholders.
Forrester argues that IBM could give Siebel the autonomy and visibility he would presumably still crave by offering up examples of IBM’s previous acquisitions where the purchased operation was run as an independent subsidiary. IBM managed to keep Frank Moss (ex-Tivoli CEO and a leading light in the systems management world) and the majority of Tivoli employees by putting Moss in charge of IBM’s entire systems management effort, keeping the Tivoli group together and leaving the subsidiary largely to its own devices, says Tom Gormley, author of the report, ‘Siebel Puts DB2 First’.
Gormley argues that there are other parallels to be drawn between the potential acquisition of Siebel and that of IBM’s Tivoli and Lotus. IBM has a history of buying top tier players for vast sums when they are ahead of the game to guarantee its success in certain sectors of the software industry [systems management with Tivoli and groupware with Lotus]. It clearly wants to make a big impact in the front office market and Siebel would provide that, he says. Certainly, IBM did create a splash when it bought Lotus for $3.52bn in June 1995 and Tivoli, the following February for $743m.
But IBM has already entered the Front Office fray via its $202m acquisition of mid-tier help desk supplier, Software Artistry. The January 1998 acquisition was made through the Tivoli systems management division that had already been building nascent CRM applications within the systems management unit. IBM made Software Artistry a separate subsidiary and re-launched the applications and business unit as Corepoint in November 1998 in a bid to raise its visibility in the front office market.
However, the acquisition does not seem to have made IBM a major force in CRM. Corepoint is struggling. The unit has yet to develop a broad CRM suite. It has the underlying call center and CTI components from its heritage as a helpdesk vendor but is still weak in sales and marketing automation, says Peggy Menconini at AMR Research. Furthermore, Corepoint is a unit racked with frustration as it fights the endless management layers required to get a prospect’s purchasing decision implemented. IBM’s torpor is causing Corepoint employees to leave, according to industry insiders. What better time to buy Siebel? argues Gormley.
The acquisition would also makes sense from a services standpoint. Integration and implementation services absorb roughly 75% of the cost of any enterprise scale CRM project. As the numero uno in consulting – IBM Global Services had a banner year last year and has managed to maintain its market lead over EDS for several years now – it could conceivably continue to fuel the Global Services growth train through Siebel implementation projects. CRM implementations will show explosive growth once companies have gotten over Y2K hurdles, says Julie Giera at Giga Information Group. It would make sense for Global Services to start implementing Siebel.
With the promise of continued independence IBM might win over Tom Siebel, but there might be one member of the Siebel board who could be left deeply unhappy about IBM taking over the business. George Shaheen, is a managing partner in Andersen Consulting, one of Siebel’s favored systems integration partners, alongside Price Waterhouse, Cap Gemini, Cambridge Technology Partners and Ernst & Young. Andersen, in particular, has been putting increasingly more resources to its front office professional service team as ERP implementations have slowed. It would therefore view IBM Global Services as a huge threat to its front office application integration business. Andersen’s stake in Siebel is not sufficiently large to block the deal going through, although it could create waves.
The primary driver behind this deal, according to Gormley, was Siebel’s decision to make IBM’s DB2 database the recommended RDBMS for Siebel’s customer relationship management applications over SQL Server and Oracle. Last month, Siebel said it expected to increase DB2-based sales to 50% by year-end, even though it will only release a version of Siebel 99 in the third quarter and has no customers using DB2-based applications currently. The implausibly stated goals of the deal imply that there is more here than meets the eye – it is the first steps towards IBM acquiring Siebel, says Gormley. He argues that the jump in market share does not compute. To reach its goal of DB2 dominance this year, Siebel would need to convert many of its current customers from competing databases and make the vast majority of new sales on IBM’s mainframe database. Even with a large discount on DB2, this is patently unachievable given the commitments that may companies have made to Oracle and SQL Server as corporate standards, he says.
Furthermore, Siebel gains little from such an over-riding commitment to DB2, he believes. Although Siebel customers may improve their price/performance ratios with a DB2-based application, Siebel could achieve this without making DB2 its preferred platform. While there’s no love lost between Siebel and Oracle, an extensive DB2 commitment is an extreme way of expressing it, he says.
Whether Forrester’s speculation proves to be correct remains to be seen, since neither IBM nor Siebel will comment. But if the transaction did take place it would send ripples through the CRM market place and make Siebel an even more indomitable force to be reckoned with.
