Beware old tech seeking fountain of youth

December 23, 2013

By Robert Cyran

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Beware of old tech seeking the fountain of youth. Hardware makers including Cisco, IBM and Hewlett-Packard – with a combined two centuries of life among them – are increasingly falling prey to natural selection in Silicon Valley. They’re devouring smaller, newer firms to keep pace, but weaknesses are getting harder to hide. That could lead to bigger, desperate deals for richly valued business software and big data companies.

The signs of carnage can’t be missed. In October, IBM reported falling sales for the sixth quarter in a row, led downward by its hardware businesses. For HP, it is nine straight quarters of a shrinking top line. Cisco recently said revenue would decline until mid-2014. Even established software and web companies like Oracle and Google are suffering when it comes to sales of servers and smartphones.

Apple is an exception, but its model of peddling highly desirable gadgets with cheap or free software isn’t so easy to duplicate. Further, competition from commoditized mobile devices running Android is biting even the iPad maker. Its sales growth is slowing.

The struggles are notable because financial statements reflect past innovation. Consistently falling sales are hard to reverse and often mean a company’s best days are behind it. BlackBerry is the latest case study. Its revenue actually kept growing even after it brushed off the introduction of the iPhone in 2007. Eventually, that changed – and swiftly.

Acquisitions, combined with cost cutting, tend to be a popular way of trying to rejuvenate. It’s often a losing proposition, though. Control premiums and purchase accounting typically muddle matters. Tech takeovers also have a habit of failing. HP alone has written down about $18 billion worth of M&A since 2011.

That won’t necessarily be a deterrent, however. Data analyzers like Splunk and Tableau Software, and cloud purveyors such as Workday and NetSuite, are among those with much brighter prospects. NetSuite, at $7 billion, is the “cheapest” among them, trading at nearly 400 times estimated 2013 earnings. Splunk and Workday, with a combined market value of over $20 billion, each fetch over 25 times estimated revenue. Slowing the aging process may prove irresistible to technology behemoths, but it would come at a hefty cost.

Comments

I see the problem as those behemoths are trying to slow technology to match their speed. But no matter what, they can’t keep up. They often buy a smaller company not to exploit the technology, but to squash it. Also they think they are going to get he techies from that new purchase too. But that often fails to work as they leave for other smaller companies, not wanting the bureaucracy of the large corps that really want them to do …. nothing. Big corporations can not innovate. They must buy it. They are simple “Me Too” organizations. Apple is making it because it is almost entirely selling to the public at large. The other behemoths mentioned are trying to sell to businesses that are plain just not buying.

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