Can/Should Xerox Monetize Non-Core Innovation?

Xerox Chief Burns discussed innovation at her company in an interview at the World Innovation Forum on June 9, 2010. She described several inventions at Xerox’s research centers such as PARC (Palo Alto Research Center) such as the graphical user interface, ethernet, and postscript without any impact to the firm's bottom line. Now the breaktrough idea is that outside firms can hire PARC and its portfolio of specialists to source their own inventions, in other words offering "outsourced innovation" services. 

I am very skeptical with the approach however - First, when Xerox has misreably failed to monetize its core innovation, how could one expect to do a better job with non-core intellectual property assets? Secondly, why wouldn't they focus PARC developpers on core-innovation first & only and establish an integrated set of processes and dialogues to inject them into Xerox core businesses to fuel growth through sustainable differentiation or new streamlined delivery models? For example, about one fourth of the projected synergies from ACS acquisition was committed based on adoption of PARC technologies at ACS in their delivery platforms.  Lastly,  after hiring a new Chief Strategist with Private Equity background, Xerox has started emulating the famous PE value creation model to re-invent itself.  However, I am skeptical of their ability to execute as religously as a PE firm against a very tough, status-quo minded culture.

You can read the speech in more detail:  http://bit.ly/bjUym9

 What do you think? Look forward to your tweets - @hakana

Deal & Dealmakers As the World Comes out of Recession

Great analysis of trends and news in mergers and acquisitions by Financial Times today as the world emerges from the recession.  I would recommend the following articles:

Good visual compilation of M&A data between 2000 and 2009:
http://tinyurl.com/32bwk5b

M&A activity slack in spite of renewed appetite:
http://tinyurl.com/3yyphdo

What are the prospects for M&A activity over the next 12 months? Given the turbulence in recent times, just what does the future hold – and how is the industry likely to respond?:
http://tinyurl.com/376yy4u

Little leverage: buyers seek alternatives to debt:
http://tinyurl.com/39szm4x

Dealmaking power shifts eastward - EMEA M&A to be spurred through continued distressed sales and Asian influence

As the world economic power continues to shift from the West to the East combined with distressed prices and sales in Europe, we will see increased M&A activity within the EMEA financial sector;  Asian players, which largely escaped the economic difficulties of the West, are expected to make aggressive moves into the weakened European market.

It is clear Asian companies looking for a foothold in Europe will seize upon an opportunity where Western European companies especially are experiencing a moment of weakness. Some of the world's biggest banks may come from the large Eastern markets, in particular China, and perhaps in time institutions from those markets will seek increased exposure and access to the economies of Europe, and seek acquisition targets.

A recent example of an Asian company zoning in on an European counterpart is that of listed Japan-based insurance company NKSJ Holdings acquiring 93.36% of Turkey-based non-life insurance company Fiba Sigorta Anonim Sirketi for USD 308M. Fiiba had interest from European bidders, but none were able to match NKSJ’s price, which was 60% higher than its nearest European offer. If Asian players really believe in buying an European asset, they will buy it. And given the financial clout many of them have above many rivals, it is often likely to win.

Deals are also being driven by banks selling assets to pay back state loans. Allied Irish Bank, Bank of Ireland, ING, KBC, Lloyds and RBS are undergoing large asset sales to pay back the state, and many of these deals will reach completion by the year-end. RBS’ multi-billion pound sale of its Worldpay unit and its William & Glyn-branded branches, for example, are anticipated to be finalized before 2011.

As the economic climate remains shaky, many other deals are expected to be delayed until conditions improve. KBC Group’s private equity division, which failed to attract the deal value from investors it had hoped, has been put on hold. Lloyds Group has also put back the sale of its 600 branch network until next year, while others such as RBS have forged ahead with equivalent sales.

Some of the sell-offs are arguably important to the reshaping of the financial sector so a slowing of the process may have wider effects. The UK, for example, has started the readdressing and reshaping of its financial hub through the introduction of the Independent Banking Commission, which in essence could look into separating institutional banks from their retail banks. If this model is decided upon, it is likely to spur further disposals among the banking community.

One such situation that could potentially come into play over the coming months is Prudential after the insurer’s failed USD 35bn approach for AIA. This could generate a break-up of either or both insurance giants, leading predatory peers to cherry pick parts of the respective firms.

Regulatory changes in the financial field could also be large catalysts of future activity. Insurance’s Solvency II, due to be implicated in 2012, revisions to Basel III, set for later this year and a review of the Markets in Financial Instruments Directive will all have consequences on the banking community, insurance sector and financial trading houses across Europe, which could again lead to a flow of consolidation.

SAP Not Interested in Buying Salesforce.com. Is SAP a Takover Target?

SAP (NYSE: SAP) is very much planning on moving into the cloud computing space but has “no interest in an acquisition of salesforce.com” (NYSE:CRM), according to co-CEO Bill McDermott. Following my long time friend Bill's appointment as co-CEO, I would expect a lot more aggressive SAP particulaly in acqusitions of  middleware integration and mid market software companies like salesforce.com to extend its market presence.

However, McDermott said that the company will instead enter the space through its Business by Design product. Business by Design, a multifunction full suite offering will be a “category killer” according to McDermott, as clients are not interested in a point system.

In order to maintain independence and avoid takeover by industry dynamos such as Oracle (NASDAQ:ORCL), McDermott said the company must “make our clients love us” and create an “ecosystem that creates reliance” on SAP.

Additionally, in order to fend off suitors SAP must grow organically, he concluded.

McDermott also said that the company’s acquisition of Sybase (NYSE: SY) is still on track for a 20 July close but did caution that date is merely “an estimate.”

On 12 May, SAP and Sybase, Inc., Dublin, California announced that SAP’s subsidiary, SAP America, Inc., has signed a definitive merger agreement to acquire Sybase, Inc., in a transaction that will bring the two information technology (IT) leaders together to enable companies to become better-run “unwired enterprises.” As a result of this transaction, customers will be able to better harness today’s explosion of data and deliver information and insight in real time to business consumers wherever they work so they can make faster, more informed decisions.

I was having lunch with a high-level Microsoft executive based in Redmond the other week. I asked him if Microsoft itself would be interested in buying SAP or salesforce.com. I was told that they did in fact look at SAP "few times" in the past but could not justify the likely price tag. However, he said that they would be always open to smaller deals in their portfolio.

Enterprise IT space has gone though massive consolidation led by Oracle. We would likely be left with only a handful corporate vendors in the end - SAP may not be one of them as an independent company but I dohave the world's respect and admiration for the new CEO Bill McDermott to take SAP to new highs that should produce highly attractive premiums in a future buyout scenario.

Alternative-Energy Firms Adapt to Europe's Woes. Consolidation Expected in Renewables.

More consolidation is on the way with European green tech companies whose sales have been largely domestic. However, times might be changing - euro will stay weak against dollar and yuan give EU's fundamental economic governance issues, unsustainable debt levels and continued demand weakness.  Given all-time high public debt, most EU governments have been canceling or downsizing subsidies extended to renewables sector. Lastly, the sector has been overinvested, overcrowded similar to the dot-com rush back in 2000 in my opinion.  Smart competitors from US or China should look into buying EU renewables companies with attractive valuations and heavy debt burden which would diminish their chances of staying float or independent.

This article appeared on WSJ today, arriving to the same conclusion:

Europe's economic woes have led Tom Werner, chief executive of solar-panel manufacturer SunPower Corp., to change the way he does business.

Companies in many industries have been affected by Europe's problems, but alternative energy companies are especially exposed. Government subsidies have made Europe a dominant market for alternative energy, and it's the world's biggest solar-power market. Indeed, SunPower gets about half its sales there.

To respond to the problems, CEOs of companies that make solar panels and wind turbines are hedging against currency fluctuations more aggressively, boosting sales in other parts of the world and raising prices. They're also trying to take advantage of lower prices in Europe by purchasing more components and doing more manufacturing there.

A weak Euro means that when sales are translated back into dollars or other stronger currencies, companies get less revenue. The Euro has fallen 16% against the dollar this year.

Euro fluctuations have already cut into profits at some solar companies. Trina Solar Ltd. registered a $14.5 million foreign-currency exchange loss. Reporting its earnings, Trina said the loss was "primarily due to the depreciation of the Euro against the U.S. dollar" in the first period.

At SunPower, a San Jose, Calif.-based maker of solar panels and cells, Mr. Werner says he's looking to generate more sales in the U.S., especially California and New Jersey, where the government is subsidizing solar-power investments. "We're allocating more resources to sales in America," he says. "You have to be diversified to minimize future swings."

The company is also hedging against currency fluctuations more aggressively, and it now hedges all of its foreign currencies in case the Euro's ailments spread.

Mr. Werner is also looking for ways to benefit from the Euro's weakness, including buying more materials like silicon and steel there.

To mitigate losses on translation costs, some companies are raising prices of goods sold in Europe, at least temporarily. John Danner, CEO of Northern Power Systems Inc., says the privately held Barre, Vt., maker of mid-sized wind turbines, which does about a third of its business in Europe, is raising prices in certain instances, in part to offset losses from the Euro's decline.

Suntech Power Holdings Co., a solar-panel maker based in Wuxi, China, registered a $22 million foreign-exchange loss in the first quarter. It is now making a bigger push into other regions, particularly the U.S. In the first quarter, European sales accounted for 70% of its revenue. By the third and fourth quarter, the company plans to decrease that to about 50%. It also plans to triple its U.S. sales from 2009, says Steven Chan, chief strategy officer.

Dixon Thayer, CEO of Southwest Windpower Inc., a privately held maker of small wind turbines based in Flagstaff, Ariz., says he anticipates having to raise prices of products he ships to Europe by midsummer if the Euro remains low.

But he also sees a chance to gain more market share in Europe while rivals are hesitating. He's toying with buying a European-based company or building his own facilities there. Currently the company doesn't make any products in Europe.

Aeronautica Windpower LLC, a Plymouth, Mass., maker of mid-sized wind turbines, is also taking advantage of the buying opportunity. It does most of its business in the U.S., but because the majority of "certified parts" for wind turbines are made in Europe, it relies on Europe for components.

"We're trying to buy five times what we normally buy," says chief financial officer Mike Glynn. "This is a pretty significant drop for us.

EMC Plans Aggressive Acquisition Strategy

EMC, the company who bought my last software firm is planning aggressive acquisition strategy as it moves further into cloud computing.

EMC Corporation, the data storage and information infrastructure provider, will aggressively pursue acquisitions as it moves more deeply into cloud computing, Pat Gelsinger, company president, said in a company conference call Wednesday.

Gelsinger said that as the smallest of the major US companies providing data storage and management services, EMC is willing to take calculated risks in acquiring operations that bring new cloud computing technology advances to help the company revise how it builds and deploys data centers. He said the company will play a "disruptive" role in "the overall IT ecosystem" as roll-ups of new technology in the cloud computing space unfold.

The company’s move toward cloud computing – Internet-based data storage, retrieval and applications – will position it to make new acquisitions that support the move into the new generation of storage technology, according to comments by Gelsinger in the conference call.

Gelsinger did not say how much EMC Corporation (NYSE: EMC) intends to commit to acquisitions and did not mention potential targets or timetables. EMC is based in Hopkinton, Massachusetts. EMC has a market capitalization of USD 38.4bn.

Consolidation expected by HP chief

The technology industry faces further sweeping consolidation among makers of the hardware, software and services that underpin corporate IT systems, according to Mark Hurd, chief executive of Hewlett-Packard, the world’s largest computer maker.

His prediction comes in the wake of HP’s own recent ground-breaking acquisitions of networking equipment maker 3Com and IT services company EDS. Along with Oracle’s entry into the hardware business through its purchase of Sun Microsystems and Cisco Systems’ move into computer servers, the deals have broken down the specialisations that defined the IT landscape and thrown a group of companies that once relied on close partnerships into direct competition.

“We think this whole theory of converging of infrastructure is how the world is going to play out,” the HP boss said, indicating that this was likely to lead to a broader restructuring across the industry.

Hardware makers would need to have a presence in all categories of networking gear, servers and storage equipment, he said. “We think going forward you’re going to need to have intellectual property in all three of those categories.”

In addition, IT companies would need a strong presence in service and software. While saying that HP planned to boost its presence in software, which only accounts for 3 per cent of its revenues, Mr Hurd refused to comment on possible acquisitions.

Already the most diversified of the large technology suppliers, the changes have threatened to stretch HP, forcing it to fight on a number of fronts against many of the biggest players in its industry. Its agreement last month to acquire struggling smartphone maker Palm has now extended the list, opening a new competitive battle with companies including Microsoft, Apple and Google.

Mr Hurd said this would lead to a new era of “competition” between the big technology suppliers, making them into rivals in some markets while they maintain their traditional role as allies in others.

HP has called off a planned launch this month of a hotly anticipated tablet computer, based on Microsoft’s Windows operating system, that had been expected to represent the first serious competition to Apple’s iPad. The HP chief also expressed a negative view on the next version of Microsoft’s mobile operating system, due later this year, though he added that the two companies continued to have “a great relationship” and were “very close partners.”

HP’s business is also more broadly spread than most other large tech companies between both the consumer and corporate technology markets.

Booz, A.T. Kearney in Talks Over Merger

As reportd by both WSJ and FT earlier, Booz and ATK are about merge to better compete with not only with big houses like Accenture and IBM Global Services but also provide a better reach outside th US, particularly in emerging BRIC an Middle Eastern countries.
Booz & Co. is exploring a possible merger with rival management consultancy A.T. Kearney Inc., according to people familiar with the situation, in a deal that would give the two midsized companies greater scale but still leave them smaller than the market leaders in a highly competitive industry.

The talks "have been going on" for a while, one person said. A merger would require approval by partners at both firms.

The merged concern would form the world's 14th-biggest management consultancy and seventh-biggest management strategy consultancy, according to Tom Rodenhauser, an industry analyst and editor of newsletter Consultants News.

But the new firm would still lag far behind major players including Deloitte LLP, McKinsey & Co. and Accenture Ltd. in an industry where scale has become increasingly important in wooing global business.

It wouldn't be the first time the two have flirted. Booz considered merging with Kearney "a half dozen times in the 25 years I was with the firm," one former Booz senior consultant said. "It didn't happen, because so few mergers of management consulting firms work," he added. "There's not a whole lot of value created by mergers."

Combining now would offer Booz additional capabilities in operations consulting, an area where Kearney is stronger, the ex-consultant said.

The talks were reported earlier by the Financial Times. "We always are exploring opportunities," Booz Chief Executive Shumeet Banerji said in a memo to employees after the article was published. He didn't say whether those opportunities include Kearney.

In 2008, Booz Allen Hamilton Inc. separated its corporate consulting arm from its bigger government business. The government advisory unit retained the original name after the parent company sold a majority stake in the unit to Carlyle Group for $2.54 billion.

Management consultancies suffered in the recession, as corporate clients pared spending. Last year, management consulting firms saw their average billing rates drop roughly 15%, according to Mr. Rodenhauser, the analyst. Executives say business has picked up this year, though.

A.T. Kearney saw revenue fall to $786 million last year, from about $900 million the year earlier. It has traditionally been strong in retail and automotive industries. In the past few years it has pursued more government business, and expanded internationally in places such as the Middle East and Eastern Europe.

Kearney is best known for its advice on operations and strategy—advising companies, for instance, on how to acquire goods and services, and make supply chains more efficient. The firm has been a private partnership since 2006, when its partners bought it back from Electronic Data Systems, which purchased the firm in 1995. It has 2,700 employees, including about 240 partners, in 37 countries.