Rudy Burger
Posted on December 13th, 2011 · Posted in blog

December 12, 2011

Gather ye round and hoist a glass to wash down the following bold and soon-to-be-forgotten prognostications for 2012.

Year 2011 was a busy one for some industry goliaths; Google completed 23 acquisitions alone this year. The next twelve months are likely to feature an increasing number of acquisitions from other tech giants who have been dormant in growth areas such as mobile, cloud computing, and social networking. Economic forecasts have begun to brighten, making investment a more attractive prospect. Meanwhile, a number of young companies have turned the corner from concept to exciting product and have, in turn, become interesting targets for the hungry giants.

China Emerges

Already this year, news from China may be signaling a shift from acquisitions of resource providers, such as oil and gas stakes, to Internet-based, IP-driven firms. Companies such as Hong Kong-based Tencent with a market capitalization of $32 billion, have the leverage to make purchases of U.S.-based Internet companies with or without investment partners.

Many Chinese manufacturing companies are sitting on large stockpiles of cash and need to make acquisitions to enable them to move up the IP food chain. To date, most have been sitting on the sidelines, due in part to concerns over having to manage and assimilate diverse business cultures. Asian manufacturing companies with a market cap of less than 1x revenue struggle with paying “strategic values” for growth stage, venture-backed, Silicon Valley firms. This is all about to change.

For example, Huawei (China’s version of Cisco) acquired several IP-driven companies from overseas this past year, including Symantec’s stake in their joint venture. Although they sometimes face stiff opposition from security-minded U.S. lawmakers, Huawei and other Chinese acquirers in both tech and life sciences will be getting, I expect, more active in the new year.

China has over 420 million Internet users, largest in the world, yet that is less than a third of the population. Still, there remains plenty of room for tech growth in China.

Smart Phone Wars

In the mobile space, Microsoft has been hurting for years. Its Microsoft Mobile operating system was initiated in 2004 and, after a series of mismanagements, was killed in 2008 to be reborn with an entirely new development team. Meanwhile, Google Android and Apple iOS filled the void.

Now called Windows Phone, the mobile operating system has struggled to catch up. According to IDC’s June 2011 analysis, Windows Phone had fallen to 3.8% of the market by midyear.

But that figure is subject to change in 2012, when Windows Phone becomes the primary operating system on Nokia smart phones. If the Nokia hardware can provide the horsepower, the well-regarded Windows Phone 7 operating system will deliver a compelling platform for building mobile apps. And Microsoft may begin piling acquired integrated companies onto that platform, such as Skype and its derivatives.

Who will dominate the Android platform? Until recently, HTC looked like the emerging leader, with its smart Sense user interface and attractive phones. While HTC invested in building its brand, Samsung, a more well-established brand, has iterated on its Android-based products to produce the Galaxy S series, which has seen wide user uptake around the world. HTC may need to make an out-of-the-box acquisition, a bold jump into a new technology, as they originally did on the Android platform. For example, HTC could move into the home automation space by providing devices to automate functions around the home. As home automation moves toward standards-based technologies, integration with larger mobile providers will simplify the acquisition process.

Among mobile phone providers, we can expect more consolidation after Google’s purchase of Motorola Mobility. RIM may be in play for purchase in 2012. The Blackberry brand is still strong, and RIM’s products are still in heavy rotation among corporate and government users. But Apple has clearly stolen their thunder. There is some restlessness among RIM investors, as the stock has plunged from $144 per share in 2008 to below $20. While Research in Motion is planning to release a new version of its operating system next year, its P/E of 4 makes the company a very attractive takeover target, friendly or otherwise. LG, anyone?

Apple

Who should Apple acquire?

We have some thoughts on that.

Electronic Arts

Electronic Arts, the leading provider of console-based games, has been making purchases in the mobile and casual gaming spaces over the past year. In 2010, EA bought Rovio of Finland, makers of Angry Birds, for $20M and followed up by purchasing PopCap games for $750M in 2011. With its recent purchase of KlickNation, EA has made a significant step into publishing on the Facebook platform.

Expect more in 2012 from EA in these areas. In recent years, the console space has been winnowed down to a few major players competing hard to develop hit-driven brands. For these expensive initiatives, it is feast or famine, and more users are choosing to get their gaming fix through casual and social network gaming. One possible target for EA is Roku, which would bring Electronic Arts gaming into the living room through Roku set top boxes.

HP Acquires Salesforce.com and Box

Hewlett-Packard is about to make a big splash back into software.

Prior to his 2011 departure, CEO Leo Apotheker noted that acquisitions will be a key part of HP’s cloud strategy, particularly in software, as the company attempts to move away from strictly hardware lines of business. It’s a sound strategy. While HP may be paying rich multiples for choice targets, the cloud has begun to gather a firm infrastructure beneath it, with plenty of growth coming. Year to date, HP has spent $11 billion in acquisitions, including the purchase of Autonomy.

As little as 2% of HP’s revenue currently comes from software, and it is leveraging its market prominence in printers to expand into print-anywhere management through its recent acquisition of Hiflex. Through its desktop computer business, HP has partnered with Box to provide to purchasers of select units automatic cloud-based storage. This type of integration may expand when HP likes what it sees and, I say here, purchases the entire company.

So far, though, these are modest steps away from the desktop. But why think small? If HP is serious about moving to the cloud, Salesforce.com makes perfect sense.

Comparatively, the San Francisco-based CRM leader has been in the cloud for a long time. Through its AppExchange platform, Salesforce.com has grown into the market leader in cloud-based application development and deployment. However, its enterprise offerings are now encroaching onto high ground for SAP and Oracle; further growth for Salesforce.com may require external partnerships. With a market cap of $50 billion, HP could purchase Salesforce.com, valued at $14 billion. It’d be pricey, but it could turn into a positive for both companies.

Yet, new CEO Meg Whitman has noted that HP will not be venturing into multi-billion dollar buys, instead focusing on fortifying HP’s balance sheet. However, if the right deal came along, one that catapulted HP into a new and hugely profitable area of growth, the balance sheet would take care of itself.

Yahoo! Goes Private

Since the firing of CEO Carol Bartz in September, Yahoo! has initiated a strategic review, which has led some to believe a takeover is in the offing. In 2008, Microsoft tried and failed to purchase Yahoo! for $44 billion. Currently, analysts are valuing the San Jose firm at around $18 billion. Happily ever after, this will not be.

Yet, Yahoo! is still viewed as a leading web portal, and its acquisition by someone with sufficient financial and market might could spell the end for AOL. Who would be that someone?

For Microsoft, the price has dropped greatly, while the attractiveness of the acquisition has held steady. Microsoft Bing currently accounts for 14.7% of search usage, and Yahoo! accounts for 15.5%; together, they would represent a strong #2 to Google’s 65% market share. Additionally, Bing has been a loss generator for Microsoft. However, the 2009 deal with Yahoo! allows Microsoft to run the Yahoo! internet search advertising business, bolstering revenue without the financial investment in the company.

Microsoft’s interest may fundamentally resolve to keeping Yahoo! away from Google, but such an acquisition is not likely. For Google, a direct purchase of Yahoo! would send regulatory red flags up all over Washington; controlling over 80% of the search engine market does not invite healthy competition. Instead, the Google play would be to invest through a third-party consortium to purchase Yahoo!, thereby gaining access to the business lines and technologies of interest to them and shutting out Microsoft. And if the bid fails, perhaps the cost becomes all the more expensive for Microsoft. Microsoft, too, would face regulatory scrutiny, which may lead to a partial investment in Yahoo! to keep it afloat.

There may be a third factor. Yahoo! has a 40% stake in China’s Alibaba, and the Asian search giant wants out. The relationship never developed well, and some believe that Carol Bartz misused one of Yahoo! finest assets. Alibaba may be partnering with offshore investment firms to buy back their stake and take Yahoo! private.

Whichever way the story of Yahoo! pans out, the company is unlikely to be swallowed whole by another giant.

Enterprise Goes Mobile

In 2012, the waves of mobile media will finally prod the giants of enterprise software into a course correction. Leaders such as Oracle and SAP have begun making steps into the social and mobile spaces, as Oracle’s 2011 acquisitions appear oriented toward services and cloud-based offerings. The upcoming year should reveal more aggressive positioning for these giants. Oracle has rolled out Oracle ADF Mobile, which enables enterprise developers to visually build mobile applications and deploy them to multiple channels. We should expect Oracle to begin making acquisitions for greater control of the technical pipeline and to thereby acquire key differentiators from its competition, such as SAP. Additionally, technical solutions for social media should be coming from these leaders, primarily through acquisition.

Retail

Microsoft must be looking with envy at the tremendous success of the Apple stores. Is 2012 the time for Microsoft to make the move into retail?

For Apple, which maintains strong control over distribution, retail operations presented an important opportunity to extend its products into broader consumer product markets. Heading into 2012, handheld technology has arrived to the masses; uppercase tech terms (“Internet” and “Wi-Fi”) have moved to lowercase. Without Apple’s brand cache among the style sensitive, Microsoft may need a branding partner to move into the mall. And what goes better with software than coffee? A purchase of Starbucks with 8,000 locations and $30B in market cap would be too expensive. But perhaps a joint venture could bring the Microsoft brand of products to the café desktop.

May the New Year bring you and yours great success. Cheers!