Sometimes It Makes Sense for a Fortune 500 Company to Closely Manage an Acquisition

On December 24, 2013 the online Wall Street Journal published an article, Fortune 500 Companies Seek Startup Mojo, which was written by Rachel King.

Ms. King quotes Peter Diamandis, ” . . . executive chairman of Singularity University and CEO of X Prize Foundation”: “‘We’re living in an interesting time where the rate of innovation around the world is exploding, and a company that is dependent upon innovation within their four walls is ultimately going to fail . . . “.

Perhaps Mr. Diamandis is correct, but once innovation has been achieved, I think it makes sense for a mature tech business to blend whatever results from innovation into its existing business infrastructure. A “hands off” policy is likely to meet the same unproductive end (meaning a failure) Mr. Diamandis mentions as he prods businesses to proceed in the manner he’s after.

On October 13, 2011, Microsoft announced the completion of its acquisition of Skype, SRL. But now, 26 months after the acquisition, it’s still not possible for a customer to reach a Skype Customer Service Agent via a telephone call. But Microsoft customers for Office 365, or its Surface 2 tablets can avail of a telephone call to reach a customer service agent. Does it make sense to juggle different customer service policies?

I don’t think so and think Microsoft is losing business as the result of this policy. I pay for Skype premium accounts for my business, but decided, recently, to remove “auto renew” from my subscriptions. Bottom line, my subscriptions are not configured as I want them to be, and can’t achieve my objective with the level of customer service I’m receiving from Skype. I’m sure my smaller business is not alone. It doesn’t make sense for Microsoft to tarnish its own brand with a wholly owned subsidiary incapable of providing levels of customer service consistent with those offered for core products.

Skype’s voice and video calling over Ethernet was a great new product for Microsoft. But please add in the top notch customer service Microsoft customers have come to expect, to keep markets happy.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


Microsoft’s “One Microsoft” Reorg Promises to Add Pieces of Google’s Business Model

As Todd Bishop notes in an article on Microsoft published on November 1, 2013 on the GeekWire website, “[t]he chief investment officer for Vulcan Capital [Paul Ghaffari], the investment arm of Microsoft co-founder Paul Allen, says the company’s next chief executive should look at spinning off its consumer products — including its Bing search engine and Xbox game console.”

I don’t agree with this notion. I think the “One Microsoft” reorganization has already started to produce favorable results. If Microsoft opts to divest itself of Bing, and/or Xbox, a hindrance to further progress may be created. More than anything else, I think the “One Microsoft” reorganization creates an opportunity for the company to incorporate pieces of Google’s business model, which, per the latest Microsoft quarterly earnings report, are already contributing to profitability and revenue growth.

The most profitable Google product has always been its search engine, online advertising, business. Microsoft’s “Bing” search engine is mentioned in the press release for the quarterly earnings report as one product line experiencing dramatic growth as compared to other components in the company’s product mix. Why impede growth in this lucrative business segment?

As well, Xbox has become, arguably, the most popular game console on the market. There’s no doubt spinning Xbox into a separate business, or selling it to another company, could be very profitable for Microsoft. But I think there is much more potential in the game console business for Microsoft, especially when Xbox is rolled into the same business unit with their Surface tablets and their Windows Phone smart phone business. The “Google Play” online store, one can argue, is contributing meaningful revenue to Google’s results. So why shouldn’t Microsoft continue to pursue a competitive business model around this product?

Mature ISVs like Oracle, and SAP are struggling. Neither of these businesses has a consumer component. The hardware business at Oracle, entered into when Oracle bought Sun Microsystems, is strictly focused on enterprise business customers, comparably sized organizations in the public sector, and players in the IaaS market. Per Oracle’s last quarterly report, this segment is not doing very well. So I don’t see where imposing a focus strictly on business computing opportunities will pay off for Microsoft.

I’m wondering if Vulcan’s comments have more to do with some of the personnel changes necessitated by the “One Microsoft” reorg, than anything else.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


An Exponential Growth in Sales is Not an Adequate Single Indicator of a Healthy Business

It’s now fashionable for investment commentators to point to a meteoric sales growth rate, sustained over several quarters of business activity, as the most important indicator of a business worth considering for investment. But a healthy sales volume for products, nevertheless, incorrectly priced, may not pay for the operating cost of a business.

An article written by Tiernan Ray, and published on the Barrons website on Saturday, September 21, 2013, BlackBerry Won’t Be the Last Victim of “Disrupters” is an example of this kind of exposition.

To understand Tiernan Ray’s concept of businesses as disrupters, one needs to buy into his notion of disruption. Disruptions can be defined as a type of business “disaster” Tiernan Ray attributes to technology companies once in an industry leadership position, but, later, merely an industry laggard. Examples of business disruptions include Blackberry, Nokia and even Microsoft. Tiernan Ray observes each of these businesses have been disrupted. They are each, in 2013, ” . . . franchises . . . displaced by newcomers . . . ” History, he claims, illustrate ” . . . those franchises never come back”.

I’m not so sure. As I I’ve noted over several posts to this blog, one of the biggest challenges facing a mature ISV, like Microsoft® is how best to put together a product marketing plan capable of sustaining the business at some reasonable size, given the level of revenue the business used to produce from the product lines disrupted by Tiernan Ray’s newcomers. Delivering Software as a Service (SaaS) via a multi tenant cloud subsription product model, historically, has NOT produced the revenue even these newcomers have required to fuel their challenges to the market leaders.

Tiernan Ray writes of two businesses he characterizes as disrupters, specifically Workday and Salesforce.com. “Workday is not profitable, but trades at 31 times this year’s projected sales, versus 3.2 times for Microsoft. Salesforce, whose earnings are a perennial matter of Wall Street debate, given that they exclude the cost of stock options, trades at 155 times the 34 cents a share it may earn this year.” These observations move me to conclude the investment community has lulled us into a mistaken set of concepts, meaning a bubble, since neither business can profitably sustain itself at present revenue levels. Even worse, I question whether dramatic growth in the sales volume of their incorrectly priced products will fix the revenue shortfall problem.

At least Microsoft is sitting on somewhere around $75 Billion in cash. I’m not sure either Workday or Salesforce.com can say the same.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


Looking Further at Microsoft’s Announced Acquisition of Nokia’s Handset Business

We’ve recently commented (via several posts to this blog) on some changes at Microsoft®. The first of our posts included notes on Steve Ballmer’s July “One Microsoft” reorganization announcement. Most recently, we noted our thoughts on Mr. Ballmer’s announcement of his planned retirement from the position of CEO of the company, to occur sometime during the next 12 months. What’s consistent about our comments is our position about just what’s important about the product mix driving revenue at Microsoft. We think it’s all about Microsoft’s enormous customer base across large organizations in the public, private and not for profit sectors, and not much about the consumer product lines the company manufactures.

So we were surprised to read about Microsoft’s intention to purchase Nokia’s handset business. This move, on paper doesn’t seem to have much to do with what we take to be the core revenue driver for this business — enterprise software sales. We aren’t alone in our viewpoint. On September 7, 2013, Barrons published an article on a related topic, It’s the Shareholders, Stupid, written by Andrew Bary. Mr. Bary quotes Rick Sherlund, from Nomura Securities, arguably the leading industry analyst on Microsoft, on the subject of this latest announcement: “‘Investors have wanted Microsoft to reduce its exposure to a declining consumer space and focus on its stronger enterprise business and pay out more cash in the form of share repurchase and dividends. Management succession was thought to help in this regard, but the Nokia deal doubles down on the cost structure for the consumer business and makes it more difficult to reduce costs[.]'” (quoted from Mr. Bary’s article. We’ve provided a link to the complete article earlier in this paragraph).

Leaving aside Mr. Sherlund’s observations on the impact of the additional overhead costs Microsoft will have to shoulder once the acquisition has completed, his remarks about investor notions of where Microsoft should be looking to repair and expand its business are entirely consistent with our ideas on the same topic. So how can the acquisition of Nokia’s handset business be seen as contributing to the success of Microsoft’s efforts to repair its core enterprise software business?

We think this move is understandable when one considers the comparatively diminutive positive impact on earnings from cloud products. If enterprise markets are truly moving away, in droves, from on premises computing solutions, then Microsoft is clearly at the start of a long road of shrinking revenue contributions from its Office products, if not its operating system profits, as well.

Smartphones are pricey devices with an average cost, here in the United States of approximately $500.00 each, if not higher. So buying an admitted laggard in the market, which, nevertheless, was once the biggest manufacturer of mobile phone handsets in the world, can be seen as a means of shoring up the bottom line with a nice chunk of hardware revenue, to copy a page from Apple’s playbook. As well, enterprise business is looking like a market in need of a replacement for the ubiquitous “Blackberry”. The Windows Phone O/S on the Nokia Lumia handset, is, we think, a very good option enterprises will have to consider.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


Is the Dell Buyout Simply Buying Time on a Trip to Nowhere?

I’ve watched the history of Dell closely over the last several years. Several of the companies Dell recently acquired, principally Quest Software, are familiar names to some of my clients. I’ve also listened to several of Dell’s most recent quarterly earnings reports and supported some of the notions management presented in these meetings.

But Dell did not schedule a quarterly earnings report for the last fiscal quarter, so those periodic management presentations came to an abrupt end. I have to say, coincidentally, I also lost interest in the company. I find it hard to follow businesses with a history of missing on objectives. Recently I had to place Dell in this group.

So when I read an article in the online edition of the New York Times, on Thursday, September 12, 2013, Dell Shareholders Approve $24.9 Billion Buyout, I came away with the thought this buyout, worst case, may prove to be no more than a means of buying time on a business plan with an ambiguous objective, going nowhere.

As Michael J. De La Merced and Quentin Hardy note in this article, “Mr. Dell has not given detailed plans for how he hopes to bring his company into the modern tech world, though he has already spent $13 billion on acquisitions, primarily software and networking companies, to build a cloud business aimed primarily at small and medium-sized businesses, long a core market for Dell.” (Quoted from an article published on the New York Times website on Thursday, September 12, 2013. I’ve provided a link to the article above), I silently noted, “what else is new? After all, these acquisitions began a long time ago. Now, after over 10 years of acquiring, digesting and integrating market leading businesses into the Dell pantheon of technology offerings, it can no longer be acceptable not to have a plan of “where we’re going”.

Of most importance, regardless of whether the company operates privately, or as a public company, there is still an imperative to make money, if for no other reason than to grow the business. So we all could use a better idea about how Dell plans on replacing lost dollars from shrinking sales of PCs, laptops, servers with seats on cloud offers.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


Microsoft Reorganization Promises to Remove Internal Impediments to Growth

We’ve written often in this blog on the topic of sales team architecture. One of the concepts we’ve written about is a matrix sales team structure. Early stage technology businesses gain a substantial amount of momentum by implementing a matrix sales team structure, which fields a healthy, but, nevertheless, contentious set of teams to do the job required of the revenue generating side of the business. When geographically focused sales team compete with national account teams, and even OEMs for the same business, you’ve got three operative units working to successfully close business for you. If your competitors have merely one unit competing with you, the odds are 3 to 1 you’ll win, right? So contention between Line of Business (LoB) units certainly has its place, at least for emerging technology businesses.

But contention between LoBs does NOT work well for mature ISVs with enormous market presence. Microsoft is an example of this type of business. Steve Ballmer’s One Microsoft announcement, and the supporting Memo, Tranforming Our Company illustrate the depth to which LoB contention probably undermined the company’s efforts to move forward from an on premises, enterprise-centric brand to a brand more in keeping with its new rivals — Linux/OpenSource (Google Chrome, Ubuntu, RedHat, etc), Google Apps, and, on the hardware front, Apple’s iPad and iPhone.

As we wrote in this blog in a post we will publish shortly, the Apple contention was really not Microsoft’s problem at all. So their announcement in late June of a port of the Office suite of apps to run on the iPhone makes perfect sense and exemplifies a big step forward — at least as we see it — towards disconnecting their brand from the brands of Intel hardware OEMs who also happen to be Microsoft customers.

From what we see of the reorganization, at least on paper, we think it’s a powerful move in the right direction for the company. We hope the results prove the announcement to be accurate, but only time will tell.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


Possessing a Product Mix is a Great Security Blanket for Early Stage ISVs

Leslie Kaufman, a staff writer for the New York Times, published an article on LinkedIn on Monday, June 17, 2013: LinkedIn Builds Its Publishing Presence. The thrust of the article cites the new “Influencers” section of the site as a new feature contributing to enhanced use of the site by visitors.

We’re also keen on the feature, but for different reasons. We think it adds a new product to the LinkedIn product mix. The main business of LinkedIn, meaning how the company makes its money, is as an advertising medium for executive search, contingent staffing and contract consulting firms. Site subscriptions are a side product, and a testimony to the health of the LinkedIn business model. We think a lot of subscriptions are purchased by individuals and businesses in the recruitment field. The LinkedIn member list is one of the best examples of a comprehensive database about people in business, and, therefore, of likely very strong interest to participants in the staffing business.

Leslie Kaufman’s article includes a conversation with Daniel Roth, the Executive Editor of LinkedIn. Kaufman writes “But Daniel Roth, the executive editor of LinkedIn, said that Influencers is catnip to executive-suite aspirants and is transforming viewer engagement on the site” (quoted from Leslie Kaufman’s article. A link to the complete article has been provided earlier in this post). “Executive-suite aspirants” are certainly of very strong interest to recruiters. So it’s easy to fold the “Influencers” feature into LinkedIn’s business model as just another attraction for the executive search clientele.

But we see it differently. The “Influencers” column adds more magnetism to the site for members, and, perhaps even members who will buy subscriptions, to gain access to original editorial content produced by well respected, successful business people.

This difference is important. Where possible, early stage ISVs should use product management to produce connected, but nonetheless separate products. If the effort is successful, then a very important risk may be rendered manageable. Too deep a commitment to a single market via one product, can be a fatal flaw, and is certainly too risky. Better mitigate the risk with a set of products tied together with common technology, but targeted to separate markets.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


Appeasing Internal Silos Concerned About An Acquisition or a Decision to Enter New Markets can be Costly

It may just be too expensive to buy the support of internal silos for a planned acquisition of a direct competitor, or a decision to enter new markets. We recently wrote about a recent experience sourcing a hard cover copy of a best selling novel. We considered buying the book from Barnes & Noble, rather than our normal process of simply ordering the book from Amazon dot com. Amazon usually charges us a fee for shipping books. Barnes & Noble has a brick and mortar location within a 5 minute drive from our office. But when we priced the book for pickup at the local store, we decided to stick with Amazon. A $17.00 purchase became a $35.00 purchase should we pick up the book at the local Barnes & Noble.

So Barnes & Noble lost our order as the result on an inability to meet or exceed a competitor’s price advantage. The tariff required to appease an internal Line of Business (LoB), in this case the brick and mortar store, was too high for us to handle.

We think the activity inside Microsoft around its recent acquisition of Yammer might produce the same type of very dangerous handicap, should LoB silo warfare spill over into the public marketplace.

This same kind of occurrence arose in the late 1990s, when the Wall Street Journal entered the online market with the online edition of the daily paper. Ditto for Conde Nast when the decision was made to enter online markets with electronic versions of its set of print magazines. When business plans require controversial strategies capable of shocking otherwise powerful internal sales teams, plan on an expensive effort to buy their support. Quantifying this anticipated cost against the likely costs of either status quo, dismantling the competitor, or permitting public competition between two offers soon to be owned by the same parent must be an absolutely mandatory step in the process of deciding whether or not it makes sense to acquire a competitor.

If you could use some help working through a range of scenarios, any of which may be triggered by an acquisition you are considering, please contact us. We offer services you can use to formalize your planning while making a best effort to consider your notion from all angles before you take a step forward on it.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


Plan on Six Months Before New Sales People Produce Meaningful Revenue

ISVs should plan on at least six months preparation time before new sales people start producing. Better not to hire new sales people than to bring them in under an unreasonable expectation of how quickly they will start selling.

New sales people must be trained before they start working with prospects and customers. A good sales training program includes:

  • a technical introduction to products and services
  • all of the information required to write sales
  • a review of the sales plan, territory or industry assignments
  • a review of the business plan
  • a review of any restrictions on selling to prospects working for regulated organizations in the private, public or not-for-profit sectors, along with proper etiquette guidelines

Tests should be included in the training program to make sure important points have been correctly understood. Any sales people failing tests should be kept in training until they pass. Sales people are often the only representatives of your business prospects meet. They need to communicate your message and accurately represent your company. If you aren’t sure they are 100% ready for the job, don’t put them in front of prospects.

Assigning new sales people to existing territories is a good way to pay for the training time. You already have a stream of revenue coming in from existing customers. New sales people with the right skills and experience can be safely trusted to manage accounts. An account manager spends a lot of time exercising customer service skills. Usually these skills are the same across an industry.

If account managers are expected to provide technical support to customers, then it makes sense not to place new sales people in these roles until they demonstrate correct understanding of technical procedures specific to your products.

Start ups and early stage ISVs have a tougher time finding a way to pay for new sales people. Usually these businesses do not have established territories requiring account managers.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved


Dell Implements an Acquisition Strategy to Fundamentally Transform Its Business Model

As we wrote in the prior post to this blog, “ready, fire aim” as a product development strategy should not be applied to fundamental transitions in a business. “Ready, fire, aim” is a method of entering markets, and, subsequently, effecting very rapid changes in product design. Doubtless, an approach like “ready, fire, aim” can be very effective for product development as it permits businesses to enter markets very early, albeit with some risk to brand should early version of products fail to meet minimum levels of satisfaction in a market.

The key objective that should drive a decision to implement “ready, fire, aim” is timing an entrance to a market. With particular regard to technology products and services, it is generally advantageous to enter markets early. Further, it is generally the case that early entrants to markets for technical solutions are harder to displace by competitors who arrive later. Therefore, “ready, fire, aim” is a sensible approach to the right set of opportunities.

Making fundamental changes to what you sell does not constitute a right opportunity to implement “ready, fire, aim”. On the contrary, it is critically important that this type of fundamental change be carefully thought through, with especial care to consider the negative ramifications of mistakes. We treated some of these points in the prior post to this blog. For the remainder of this post, we think it will be useful to present our view of what Dell is up to with its recent set of acquisitions, given its intention to transform its business. We do need to note that we do own shares of Dell stock; therefore, we have an interest in Dell succeeding at its strategy. The reader has now been warned.

In fact, Dell is looking to make the same type of fundamental change in its revenue model that we have presented in these recent posts to our blog, albeit at a much bigger scale. We are focused on emerging tech businesses. In contrast, Dell is a mature, publicly traded businesses with a major presence in the markets for hardware products like desktop computers, servers, networking devices, printers, backup solutions, and more.

Back in 2007 Dell publicized its intention to enter other markets, namely the solutions markets for enterprise business (we are using this label to include public sector organizations of comparable size, as well as comparable size organizations in the not for profit sectors) needs for software solutions, and, integrated solutions that include hardware and software components, together with the specialized expertise required to put all of these components together into a working system.

Over the last four years Dell has consistently executed on this strategy, albeit with a level of positive effect on its bottom line that has not meant with widespread approval from the investment community. It is not our intention in these posts to opine on why Dell has only marginally benefited from these acquisitions; rather, we make reference to Dell as an example of why a business should consider buying its way into a market, rather than trying to build a presence from ground up. We think Dell’s plan makes sense, and, further, constitutes a safer method of fundamentally transforming a business revenue model.

In the next post to this blog we will look at a typical problem area that can stymie a business looking to buy its way into a market — assimilation.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved