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Bitten by an ASP

With M&A activity hotting up in the IT sector, customers may want to redo their contracts with tech outsourcers. Plus: HP's new positioning.

The ongoing opera starring Oracle, PeopleSoft, and J.D. Edwards, has many IT-watchers (this one included) predicting a consolidation in the technology sector. Indeed, if Oracle’s hostile takeover bid for rival PeopleSoft is approved by government regulators and PeopleSoft shareholders, it will very likely trigger a feeding-frenzy in the tech world.

Certainly, the M&A tumblers for the IT set are all falling into place. As reported in an earlier Tech Strategies, about 70 percent of technology companies have a market capitalization of under $250 million. That’s a whole lot of small software/hardware vendors out there, and all are vying for the attention of tight-fisted — and increasingly skeptical — corporate customers. Privately, a number of CEOs at technology companies have been saying that consolidation must come to the sector if the industry is truly going to get healthy.

Morever, the price of acquisitions may never be cheaper. Even with the recent run-up on Nasdaq, the share prices of many IT companies remain well below their historical highs. A goodly number of investment bankers — no doubt hurting for business — are likely advising CFOs that these prices won’t last long.

And while a resurgence in tech stock prices may force corporate acquirers into action, it will also make their all-stock offers damned attractive to potential takeover targets. What’s more, with interest rates at historical lows, debt servicing should not be particularly onerous for all-cash bids like Oracle’s.

All of which means: the deals are coming (see paragraph 1, sentence 3). Actually, the deals have already started. Besides the Oracle bid (and PeopleSoft’s proposed friendly merger with J.D. Edwards), business performance management specialist Geac Computer Corp. announced last week that it was acquiring Comshare. And a few month’s back, budgeting & planning vendor Cognos acquired rival Adaytum.

This dust-up in the tech sector is more than just a localized event, however. If you don’t think so, just ask CFOs who were all set to sign off on the purchase of a PeopleSoft ERP module on June 7 — the day Oracle announced it’s bid for PeopleSoft. That’s also the day Oracle indicated it would not bring out new versions of PeopleSoft products.

The bump up in M&A activity also has serious repercussions for companies that outsource their applications hosting — and that’s getting to be a long list. The concern: what happens if your application service provider is suddenly bought by another ASP, or your ASP is no longer able to offer a particular product because the maker of that product has been acquired and shut down?

To avoid unpleasant surprises, tech consultants advise finance chiefs to revisit their contracts with their ASPs. Says Ted Chamberlin, industry analyst at consultancy Gartner: “Enterprises should consider including a 25 percent acquisition clause into their contract, which allows the enterprise to get out of the contract if the service provider is more than 25 percent acquired by another company.”

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