Greatly Exaggerated?
Salesforce CEO, Marc Benioff
Today Bloomberg was atwitter with the rumor that Salesforce is in talks with bankers about possible tender offers from some big companies in the industry. Aside from wondering if there’s any validity to the speculation does it or would it make any sense?
For starters, Salesforce has a market cap north of $50 billion and buyouts command a premium so we’re looking for someone with deep pockets. Regardless of pockets, Oracle, Microsoft, and SAP have their own cloud projects and while any of them could afford the deal, would they contemplate throwing away their other investments? Ordinarily I’d dismiss a sunk-cost argument as illogical but we’re talking about a lot of money.
IBM could do the deal too and they need a future. Right now they’re buying back stock to keep their share price up and because they don’t have much else to spend their war chest on. Salesforce would be good for soaking up some of their cash. Ditto the others on the list.
Salesforce has a commanding lead in business software because while others were too timid to go after things like cloud, social, mobile, and IoT, Salesforce jumped in and made markets. Their future is full of all the new markets they’re going after and it ain’t small.
From that perspective, I wonder if the Justice Department would want to weigh in on an acquisition. Despite there being other vendors in the space, Salesforce occupies a unique place as the innovator. Can we really expect one of the possible suitors to be as aggressive with Salesforce and new markets as Benioff and company? Me thinks not.
That said though nothing is forever and Salesforce has had a great run. Murphy’s Law would suggest that someone could come in and mess it up.
FinancialForce Investment
It takes prodigious amounts of moola to launch a company these days and that’s especially true when trying to insert a new idea into the collective consciousness. Salesforce spent well over $100 million to convince us that SaaS CRM was real, Zuora has raised nearly 2X that amount defining the subscription economy, and cloud ERP is following suit.
Today FinancialForce, a cloud ERP provider based on the Salesforce1 platform announced a financing round of $110 million from lead investor Technology Crossover Ventures (TCV) and Salesforce Ventures, Salesforce’s corporate investment group. This follows on the heels earlier this quarter of smaller investment announcements by CPQ providers Apttus, and Steel Brick. So what does it all mean?
I think you need to pay attention to the concentration of money and deals in a tight space of ERP and related back office apps. They’re all cloud companies and it strikes me that the investment community is making a decision about ERP granddaddy SAP in the process.
SAP has tried several times to bring forth a suite of front and back office solutions based on modern cloud technology and they’ve been only modestly successful. Microsoft has made greater strides in bringing its multiple ERP products closer to the cloud but progress has been measured. Time’s up and small ERP providers like FinancialForce, IntAcct, and not so small NetSuite have been gathering strength over many years. The economic conditions are right and the market is, I think, making a call that there’s no more runway for legacy ERP vendors to get to the cloud; it’s time to seek out the next generation of solutions.
The succession plan for replacing legacy ERP is well under way with a surround strategy that first positions cloud ERP as a helper application that can consolidate data, process it, and feed it up to the legacy system. This is a meta-stable state and will eventually result in the surrounding solutions supplanting the legacies, achieving over time what a much despised rip and replace would ordinarily accomplish without all the wailing and gnashing of teeth.
Much of this is still in the future but for now, FinancialForce has taken an important step in preparing for a larger role in what is likely to be a big fight. The objective of the fight will be to secure stable cash generating relationships for many years to come.
Finally, more than once Marc Benioff, CEO Salesforce.com, has said he had no interest in building ERP but it looks like ERP is coming to his company regardless via the powerful platform technology, Salesforce1, that his company provides. Apttus, FinancialForce, Steel Brick, and other financial apps all coexist with Salesforce1 and some, like FinancialForce, are completely rooted there. Their success is also great validation for the platform.
I’d really hate to be a legacy ERP provider today.
Et Tu Symantec?
Just as we were trying to digest the HP announcement that it would cleave amoeba-like into two distinct entities, Symantec has announced the same intent. This also follows eBay’s announcement that it would spin off PayPal, so says the New York Times. And what do eBay and HP have in common? Meg Whitman. What’s going on here? Healthy capitalism I say.
Look, lots of companies acquire other businesses as they seek faster growth and greater synergies in their markets. Often times the acquisitions don’t work out exactly as the acquirers had hoped. The worst-case scenario is when the acquired company fizzles either because it could not be assimilated or because it was a dud to begin with and of course, there are numerous permutations on the theme. But often enough to be interesting the merged entity continues along two separate paths with both companies continuing to be successful but in their own ways.
So every now an again it makes sense to take inventory and ask if all of the acquisitions or self-generated businesses provide the kind of overall synergy needed. If not, it’s time for spinoffs and we’re beginning to see several as the foregoing paras indicate.
Yesterday I wrote that Oracle might be another candidate for splitting up and old friend Josh Greenbaum heartily agrees so I’ve got that going on. If you read that article from the Times, you might get the idea that spinoffs might be the next big thing in Silicon Valley and beyond. If so, and if the idea gains enough steam, this trend might depress the regular IPO market. What would you rather buy, a start up doing an IPO or a division of a seasoned company with a track record and a culture accustomed to hitting its marks? There are good reasons for both.
I don’t think we’ve ever seen anything like this in the tech sector. Last time there was an opportunity was the end of the mini-computer era and instead of spinning off units, those companies imploded. There was wreckage everywhere and truth be told, the networked PC and server world envisioned to replace it was a little late in coming — recall the year of the network that only took a decade to reach fruition. That resulted in a nuclear winter where no one wanted to buy much because it was all either obsolete or not up to snuff.
That’s not happening this time in part because the legacy products are so embedded in our businesses today and because much of it is paid for already so what’s the cost of keeping it?
Spinning off non-core businesses to concentrate on the knitting is smart for both parties and should result in significant new innovation and entrepreneurship as newly liberated companies take off their blinkers and design and build products for new opportunities in the whole market, even for companies that were once competitors.
Companies as big as Oracle and even Microsoft might benefit from a spinoff strategy and I suspect there are new business models to be tried too. Although the flavor right now is to spinoff an entity to be completely free-standing, I can see situations where more interlocking arrangements can be developed. The Japanese might call these keiretsus though we might think of them as monopolies or trusts as in the Sherman Anti-trust Act.
In the long history of capitalism, this seems to be a phase that recurs when conditions are right — it happened with Oil and Steel and automobiles though it was sometimes called vertical integration. Whatever it turns into I think this week might have seen an inflection point.
Larry Ellison
NOTE: This has been edited to correct the spelling for Safra Catz’ name and to remove a ‘not’ that completely misled my meaning.
I was going to write a post about Larry Ellison leaving Oracle after he announced his retirement on Thursday but it is probably pre-mature. Ellison will become the executive chairman while Safra Catz and Mark Hurd run the shop as co-CEO’s and I have a lot of doubts.
It’s not that Safra and Mark are competent executives because each has held down significant positions for a long time. Recall Hurd was CEO of HP a while ago and Catz has had significant responsibilities at Oracle. But two things strike me. First Larry isn’t going anywhere. If he said he was going sailing or going to live on the island he bought in the Hawaiian Islands that would be a good indication for retirement. But as executive chairman, Ellison will still be heavily involved in the day-to-day operations so I am not sure what if any difference this will mean.
Second, I am leery of two riders on the same horse, which is what you have with co-CEOs. It’s not a good idea — heck sometimes one CEO is too many. By keeping Catz and Hurd in the same relative positions they were in when Larry was CEO we run the risk of losing steam, credibility, innovation, and creativity.
I see this situation as an analog to Microsoft. When Bill Gates retired, Steve Ballmer was waiting in the wings. He was one of the original team and he was a continuation of Gates possibly without Gates’ smarts. In the event, Ballmer stayed the course, rewriting Windows every few years and living off the cash cows and that was exactly what Microsoft didn’t need.
The list of markets that Microsoft plays in but does not lead as a result of a drowsy decade of following Ballmer’s script include cloud computing, phones and tablets, and CRM. We’ll see about the Internet of Things (IoT). I fear that something similar could happen to Oracle. The company has bought a lot of other companies recently and knitting them together is a big job that has to be done but I am not sure that constitutes a vision of where business computing should go and I am not sure the new team has that vision.
Perhaps the vision exists in some of the people who came into the company from the acquisitions, an iffy proposition to be sure. Very often when a company gets bought, the founders and lead talent make enough money to leave. They work through a transition period and then depart for some beach to contemplate their next moves. Some stay. Anthony Lye was a great case in point. He came with the Siebel acquisition and turned Oracle’s CRM group into a real money maker. But he’s gone along with many others.
So the question is what’s next. How long will the transition of Larry all the way out of the organization take? The answer will manifest itself when Larry really does retire and more visibly when we see some new blood in the corner office driving a new vision of Oracle.
Good to Gooder
So far, Satya Nadella’s moves as head of Microsoft echo the teachings of Jim Collins’ 2001 best seller, Good to Great. It’s a book about how and why some companies wallow in mediocrity and others operate at several levels of magnitude higher than their peers — think Apple for one and Salesforce for another.
Nadella has done a good job of articulating a vision for Microsoft — a Collins fundamental — and now he’s on to getting the right people on the bus and getting the wrong ones off. By wrong we should be clear that wrong isn’t bad, it’s just not in the direction of the future.
A clear example would be hardware. Microsoft added 25,000 people when it acquired Nokia and about 12,500 of the announced layoffs are scheduled to come from that workforce. These are good people, mostly, who make things that under, Nadella, Microsoft would prefer not to make though Steve Ballmer thought otherwise. To be fair to both people, there are a lot of things that Nokia had to do as an independent company that can now be rolled into Microsoft’s operations. Acquisitions always find these kinds of economies.
In this process, Nadella is articulating his vision more deeply because his actions are telling everyone this is what we do well and what we need to do more of. This is our future. At the same time, Nadella is, perhaps confronting some brutal truths, for instance, that Microsoft will not unseat either Apple or Google in the device and probably tablet arenas. Google’s Android OS is ubiquitous and free — not simply cheap — so it’s hard to compete. Also, vendors of devices that use Android are selling at cost (of the hardware that is) so it’s easy to see that if you want to make a lot of money in devices, you should stay out of the way and count the money you didn’t waste.
Next steps in this rolling reorg should be hiring and expansion in the areas where Microsoft can compete strongly. That should mean cloud computing in all its forms and possibly some really focused vertical market strategy for the Surface. Microsoft has some great technology and patents in Surface as well as in patents for sensor technologies. You don’t play three dimensionally exacting games like golf on XBox without some dandy sensing technology and that same stuff should find its way into myriad small devices that compete in the IoT bubble that’s rapidly ramping up.
If I had to guess, I’d say that Microsoft’s biggest next opportunity would be IoT and supporting the new business processes that it will spawn and Nadella has already made reference to processes several times.
At the same time, there is work to be done in Microsoft’s more traditional products. Things like Windows are unacceptably hard to install and use and that beast needs to be tamed once and for all. The company has a proud tradition of engineering and technical excellence around the OS but, let’s face it, today the OS is meant to be seen and not heard. Also, Apple announced almost a year ago that OSX would henceforth be free. It’s a simple download and at a cost of zero, there are shades of Android all over the place.
So Microsoft’s sweet spot seems to be in its server software, database, and Office, which should be all over Android, iOS and the Web as it is on OSX, and future IoT strategies. If you put that together there’s more than enough to occupy the company and to boost its revenues. That includes CRM and back office ERP systems. But while Microsoft prides itself on offering an integrated suite of front to back office solutions it’s going to need to decouple them and make all its solutions better able to work with other products like NetSuite, Salesforce, Oracle, SAP, and other apps that exist in other ecosystems.
In that vein, consider that last week, Apple and IBM announced a partnership that bypasses the things that made these companies competitors and focuses more on what they can do together. It’s a sign to me that we are changing paradigms again. Platforms used to mean operating systems, compilers and databases and while they’re all still vitally important, they’ve been commoditized to the point that they are increasingly homogeneous.
The new platform battleground will be in apps, their development and maintenance. A great example of all this is Salesforce which, I believe, uses the Oracle database, along with some lesser known products as well as Linux. What’s behind the Salesforce screen is largely taken for granted these days and the emphasis there is on apps and business processes, as it should be.
If that’s true, and I think it is, then that’s what Nadella is pushing his company towards. It might still require more cutting and reforming but that’s business and for Microsoft this change was overdue, but at least the company is now on the move.
