While industry consolidation has been happening for decades, Cisco's announcement of a server product in 2009 can be viewed as a seminal event, triggering more significant merger and acquisition activity. Oracle's decision to acquire Sun in 2009, which finally was cleared early in 2010, provided more fuel to the fire.
Large IT providers want to build out what might be called “the enterprise stack” – a one-stop shop for companies that have been on a journey to implement both internal and hybrid cloud architectures since the start of server virtualization in the middle part of the last decade. IT providers are clearly moving away from playing nice with fellow industry stalwarts via resale relationships and joint solution sales – they are banking on companies not looking at going “best of breed,” but rather wanting to buy the stack from a single vendor. This is a major bet and in many ways is reminiscent of how companies procured and implemented technology in the 1970s and 1980s.However, while the allure of better pricing based on giving a smaller group of vendors more of the budget is being acknowledged as interesting by some. The big challenge is how “embedded” vendors have become, especially around skill sets. Many large vendors are expected to try and get the stack installed in an external service provider with the goal to move it into private data centers over time and offer seamless “hybrid” functionality.
With this as a backdrop, the M&A pace will only heighten over the next 12 to 24 months, fueled by where the large IT providers have gaps in their offering. For example, HP went on the offensive – after the 2009 Cisco server announcement – by buying 3Com to fill its networking void. In the process, it stopped reselling Cisco networking products. HP's purchases of 3PAR and ArcSight are also part of the plan. So where does this leave key sectors moving forward?The information security market has had a steady flow of M&A since 2002 – remember pure-play, public companies like RSA, ISS, NetScreen and, most recently, ArcSight and McAfee? What the large vendors are doing is bundling major components of information security into their stack offerings. The macro trend for the field looks to be the stack providers trying to control a large percentage of budgets that formerly went to pure plays. Storage has had a lot of recent M&A activity, with the 3PAR bidding war and discussions around Isilon, Brocade, Compellent and CommVault being targets. Our research shows EMC and NetApp as industry leaders with the stack providers trying to bolster their offerings. We believe all the names in the storage sector are potential takeover candidates – with EMC being the largest one by far, but one that makes sense due to its installed base and majority ownership of VMware. Storage budgets have come back nicely in 2010 and the largest spenders have plans for strong spending in 2011. It is a key piece of the stack, which makes this space a prime M&A target.
In terms of networking, several stack providers have gaps, which makes Brocade and Juniper interesting. This is an area where there is still some resale happening, i.e., IBM reselling Cisco solutions.The server market is concentrated from both a hardware operating system and hypervisor perspective. Nonetheless, the stack providers have gaps, which makes Red Hat and a portion of Novell interesting.
No matter how this all plays out, 2011 looks to be an exciting year as the rollouts of internal and hybrid clouds intensify and the stack providers' stories coalesce and come to market.