Rollups In Our Lunchbox

There's been a lot of chatter about the acquisition of Perot Systems by Dell this week. It's not surprising that in a slow news week so much attention is being given to a deal that is only one of many that have happened in the past few months. Most of the commentary is the typical stuff such as “This will (or will not) help Dell compete against IBM and HP.” or “Dell service partners will (or will not) be mad as hell.”

I'm more interested in what the Perot acquisition says about the state of the computer industry. Since 2000 the computer industry has been consolidating, coalescing into a handful of companies that directly deliver solutions to customers. The rest of the industry exists to serve these mega companies. It's like the car industry. There are only a half dozen companies that sell cars and services to the vast majority of consumers. The rest supply parts such as headlights and seats.

You can easily tick off the number of computer companies that sell the majority of equipment to both business and consumers. Dell, HP, IBM, Cisco, and EMC are delivering complete solution sets in all segments including enterprise computing of all types, consulting services, and consumer products (through brands like Linksys and Iomega). Microsoft is a special case. It is a major, first tier company that sells mostly software (mice and Xbox systems aside). I wonder how long it will be before Ballmer buys a large or specialty hardware company like Acer. I wonder about the same for EMC. How long before they buy a specialty server company or small networking company.

There are a few companies overseas that are part of the mix as well such as Hitachi in Japan, the aforementioned Acer in Taiwan, Lenovo and Huawei in China and Groupe Bull in Europe but their sales, product depth, and international reach pale in comparison to the biggest five or six American companies. Don't kid yourself though. Any of those could be the next Toyota. Or a great acquisition. These folks compare to Fiat. Not GM or Ford but certainly an important company.

Apple is important but still small in comparison. They are like Porsche - a well-known, high-end luxury brand that people pay more for because they want something they perceive of as special. They are technology trailblazers with a great sense of style. More taste maker than mainstream sales giant.

Unlike the auto industry, there is still a healthy second tier that is trying to move up. NetApp comes to mind. Brocade and Juniper too. These companies are centered around being best of breed in one area of the industry such as data storage or optical network equipment. This segment keeps getting smaller though. How much longer can Brocade or Quantum remain independent? Sooner or later the combination of size and narrow focus will make competing against the top tier impossible. They won't be able to offer anything unique enough or broad enough. They will either sell out in some face saving “merger” or go the way of SGI, becoming mere shadows of themselves. Perot Systems is a great example of a second tier player (IBM GS and HP Consulting they are not) being absorbed by the first tier. Second tier players provide entry into a whole new segment for a big company.

There is also a whole host of small companies that supply specialty equipment or develop new technologies for big companies. These small companies are technology Spackle. They fill holes in a big company's product line. A few will grow independently but most will be gobbled up by bigger companies. Some will fail altogether. A great many will stay small, too small to acquire. They will continue to survive by supplying critical parts to the big boys. There are lots of small companies that make specialty chip designs or cores, RAID controllers, and software libraries.

This year has been a banner year for rolling up small companies. With credit tight and VC money still not flowing free a great many small companies are realizing that, despite current success, they won't find the money to grow. Really, how many computer technology IPOs are going to happen over the next two years? For many small companies it's grow or die... or sell out. For the big companies this is a boon if they have cash on hand. They can buy out the smaller players for much less money then they can in good times.

So, what's next. I think the majors will continue to buy companies. Dlink is a good acquisition target. They have a great consumer and SOHO line that would help out HP or Dell. The macro trend will continue for awhile. Tight credit and investor wariness will make life difficult on the companies exiting the startup phase. The biggest companies will take this opportunity to reinforce or extend their product lines, perhaps even get into new segments.

So, if you aren't selling cars to millions of people, you are probably selling headlights to the guys who make the cars. Don't feel bad. There's opportunity in that.