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Death, Taxes, and M&A

By Mike Rothman

Ben Franklin was a pretty smart dude. My favorite quote of his is: “In this world nothing is certain but death and taxes.” For a couple hundred years, that was pretty good. But at this point, I’ll add mergers and acquisitions as the third certainty in this world. Maybe also that your NCAA bracket will get busted by some college you’ve never heard of (WTF VCU?).

We saw this over the weekend. AT&T figures it’s easier and cheaper to drop $39 billion buying T-mobile than build their own network (great analysis by GigaOm) or gain market share one customer at a time. And in security, there are always plenty of deals happening or about to happen. Remember, security isn’t a standalone market over time, so pretty much all security companies will be folded into something or other.

Take, for instance, WebSense trying to sell for $1 billion. And no, I’m not going to comment on whether WBSN is worth a billion. That’s another story for another day. Or the fact that given Intel’s balance sheet, McAfee will likely start taking down bigger targets. All we can count on is that there will be more M&A. But let’s take a look at why deals tend to be the path of least resistance for most companies.

  1. Outsourced R&D: Anyone who’s ever worked in a large company knows how hard it is to innovate internally. There is a lot of inertia and politics to overcome to get anything done. In many cases it’s easier to just buying some interesting technology, since the buyer has a snowball’s chance in hell of building it in-house.
  2. Distribution leverage: There are clear economies of scale in most businesses. So the more stuff in a rep’s bag and the bigger their market share, the more likely they’ll be able to sell something to someone. That’s what’s driving Big IT to continue buying everything. This also drive deals like AT&T/T-Mobile, because they are buying not just the network, but also the customers.
  3. Two drunks holding each other up: Yep, we also see deals involving two struggling companies, basically throwing a hail mary pass in hopes of surviving. That doesn’t usually work out too well.

And those are just off the top of my head. I’m sure there are another 5-10 reasonable justifications, but from an end-user standpoint let’s cover some of the planning you have to make for the inevitable M&As. We will break the world up into BD (before deal) and AD (after deal).

Before Deal:

Your guide to M&A prep...

  1. Assess vendor viability: First assess all your security vendors. Rank them on a scale from low viability (likely to be acquired or go out of business) to rock solid.
  2. Assess product criticality: Next look at all your security products and rate them on a scale from non-critical to “life is over if it goes down.”
  3. Group into quadrants: Using vendor viability and product criticality, you can group all your products into a few buckets. I recommend 4 because it’s easy. This chart should give you a good feel for what I’m talking about.
  4. Define contingency plans: For products in the “Get Plan B now” bucket, make sure you have clear contingency plans. For the other quadrants, think about what you’d do if there was M&A activity for those offerings, but they are less urgent than having a plan for the critical & fragile items.

After Deal:

  1. Call your rep: Odds are your rep will be a pretty busy guy/gal in the days after a deal is announced. And there is a high likelihood they won’t know any more than you. But get in line and hear the corporate line about how nothing will change. Yada yada yada. Then, depending how much leverage you have, ask for a meeting with the buyer’s account team. And then extract either some pricing or product concessions. The first renewal right after a deal closes is the best time to act. They want to keep you (or the deal looks like crap), so squeeze and squeeze hard.
  2. Call the competition: Yes, the competition will be very interested in getting back in, hoping they can use the deal’s uncertainty as a wedge. Whether you are open to swapping out the vendor or not, bring the other guys in to provide additional leverage.
  3. Revisit contingency plans: You might have to pull the trigger even if you don’t want to, so it’s time to take the theoretical plan you defined before the deal, and adjust it for reality now that the deal has occurred. Evaluate what it would take to switch, assess the potential disruption, and get a very clear feel for how tough it would be to move. Don’t to share that information with vendors, but you need it.

None of this stuff is novel, but it’s usually a good reminder of the things you should do, but may not get around to. Given the number of deals we have seen already this year, and the inevitably accelerating deal flow, it’s better to be safe than sorry.

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Comments

@Tim,
Man, haven’t we seen this movie before? All the US carriers aligned with a EMEA partner(s) back in the mid-90’s. That didn’t work out so well. And there were big anti-trust issues with BT trying to gain a bigger foothold in the US (remember the BT/MCI deal got scuttled if memory serves).

It’s been a long time since I’ve followed telecom, but it seems to me like a market share and network capacity grab. Pure and simple. They can’t build it fast enough (given spectrum limitations), so they have to buy it. Or something like that.

Though a tighter alliance may be OK for customers, but only if they can eliminate the finger pointing, which was a huge issue during the first wave of these alliances.

Mike.

By Mike Rothman


Mike,
One of the interesting nuggets of the deal is actually the 8% of shares DT obtains of ATT. That has potential to not only impact the Mobile market, but think about the global carrier space. ATT struggles in Europe and DT struggles in the US, maybe another alliance in a few years to bridge the backbone networks.

By Tim


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