December 29, 2014 1 Comment
Tools and Tactics … To Do Better Deals
by Steve Gutzman
Too Big to Negotiate?
It seems that everywhere we look things are getting bigger. The small corner store gives way to the mega mall, the once enormous 55-inch flat-screen TV is now double the size, data is no longer just data – it’s big data – and everything from cruise ships to cheeseburgers is getting supersized. Even Roger Federer got into the act at the beginning of the year after winning the Dubai Duty Free Tennis Championship, claiming that a bigger racquet head helped his game. But is bigger always better? And have some technology companies, through acquisition, become too big to negotiate?
In the business world, the scorecard for acquisitions is mixed. On the positive side you have XM/Sirius, Disney/Pixar, JPMorgan/Chase and Exxon/Mobil. In these transactions it can be safely argued that shareholder value was created and end users benefited. Some not-so-good collaborations included Sprint/Nextel, AOL/Time Warner, Alcatel/Lucent, and HP/Compaq. In these transactions shareholders did not fare so well.
We all understand from our U.S. history books that when companies get too big, the government can step in with an 1890s-era federal statute known as the Sherman Antitrust Act. If Teddy Roosevelt had not gone on his trust-busting campaign in the early 20th century, Standard Oil would now be worth an estimated $1 trillion.
In a strange twist, the government recently stepped in not to break up some very big companies in the financial industry-but to keep them alive. Too big to fail championed the theory that some financial institutions had gotten so large and interconnected, and their importance to the economy so great, that they had to be supported by the government or catastrophic economic harm would follow if they failed.
And what about the high-tech industry? According to Gartner, over the past five years the high-tech industry has grown approximately 16 percent. In that same period the top five publicly traded high tech companies have grown almost 45 percent – with most of the growth coming from acquisitions.
The reasons for technology acquisitions are many and include such objectives as accelerating entry into a strategic market where internal development would take too long, plugging a technology or talent gap, buying a distribution channel in an industry or geography where there was no presence, eliminating a competitor, and as is often the case, especially with software companies (think IBM, Oracle, SAP and CA), acquiring a maintenance install base that can provide additional leverage for enterprise license agreement negotiations. This last point cannot be overemphasized enough, as this is where “sticky products” (products that cannot be easily uninstalled) create leverage, and leverage creates tremendous negotiation advantage. By some Gartner estimates, the costs associated with switching away from an incumbent range from 300 percent to 700 percent of current fees.
In an industry where corporate strategy often boils down to “grow or die,” it is unlikely that acquisitions are going away anytime soon. With few exceptions, growth in the high-tech industry cannot be achieved through organic means alone – acquisition is often a central part of the story. So what can be done from the buyer’s side to protect against the inevitable?
First, assume that the company you are negotiating with will one day be consumed by one of the top-tier players. As ICN recommends, prepare for the divorce before you get married. Think ahead to what your technology options could be down the road and understand the conversion costs of going to a different platform, service provider, cloud provider, third-party support provider, or open source provider. Even if it is a very big number, it may not be as big as the new number you will see at renewal time after an acquisition. This may not change the procurement decision, but at least when the acquisition letter arrives, it will not be a total surprise.
Second, look at your terms through the lens of one day renegotiating these same terms with one of the bigger players. Price protection on new purchases, maintenance caps, license swaps, audit protections, usage rights, user profiles, and license metric change protections are but a few key terms that need to be carefully worded. As software maintenance is of particular value to the vendors (85+ percent margins), the vendors have become very protective of this revenue stream and so two additional areas need to be underscored: buy only what you need, and if a bundle of products is proposed, make sure that you have a written description of what each product does. Vendors love to include lots of additional products under the guise of value enhancement and they love to bundle products so that they can sell add-on features down the road. Be wary of these contracting tricks, as they are designed with one goal in mind: to increase leverage at the next negotiation event. A clause that says, “If the functionality is re-bundled, repackaged, or renamed, but is the same or substantially similar, extra maintenance will not be due,” can save you a lot of money and headache.
Third, don’t fall into the trap of thinking that escrowed source code gives you all the protection you need. Working with source code requires highly skilled programming resources; most companies do not count this as a core competency. Having access to source code is one thing. Knowing what to do with it is quite another.
And finally, understand that after acquisition your options are limited. The acquiring vendor typically applies a full-court press to convert all the contractual paper of the acquired vendor to their paper. There may even be some incentives involved. But in the end, if a customer insists on keeping their old contract (there are always a few in an acquisition), the likely outcome is that the contract will simply be left in the legal entity of the acquired vendor – which in essence becomes a shell company with no support, no people, no upgrades, etc.
The bottom line is this: The big players are getting bigger and this inescapable trend should at a minimum compel a discussion on the elasticity of each major technology platform and the available options if the vendor becomes too big to negotiate.
Steve Gutzman is a senior advisor at ICN and a 35-year veteran of the high-tech industry. You may contact him at email@example.com.