From Briefing.com
Updated: 28-Jun-05 14:43 ET
Sun Buys SeeBeyond To Move Up In Value Pyramid
[BRIEFING.COM - Robert V. Green] Sun Microsystems (SUNW) announced today that it would buy the small integration tools company, SeeBeyond (SYBN) for $387 million in cash. On the heels of their acquisition of Storage Technology, they are clearly trying to change their strategic focus and move up in the value chain of information technology.
Sun Microsystems Problem
Sun Microsystems was one of the great drivers of change in the computer industry, although it has not always been a beneficiary of the changes it introduced.
Although most famous for one of the early developers of workstations, Sun has always embraced networking and the internet more strongly and earlier earlier than the other workstation vendors.
Even the very first product introduced by Sun, in 1982, included support for the TCP/IP protocol, which evolved into the standard for internet data transmissions. An early adopter of NFS, the first file sharing protocol, allowed Sun to promote networking of disparate systems. Finally, the introduction of Java in 1995 altered the concept of a network being separate independent computers linked together to the vision of today, where the user's interaction and the location of programs and data is irrelevant.
However, despite being a technological catalyst that helped create the internet of today, Sun itself has not clearly reaped the rewards of its innovations.
Although SUNW stock rose from $3 per share in early 1996 to more than $60 per share in 2000, all of that increased value has been lost in the past five years.
The problem has been that Sun Microsystems has remained at the platform level of the technology value pyramid. That level eroded as a driver of value creation over the past years.
The Technology Value Pyramid
Technology for building an IT (information technology) system used by enterprises (large businesses) can be thought of as having three distinct layers called domains. The following table summarizes this useful way of thinking about technology.
Domain Examples Comment
Applications Everything from word processing to business intelligence The reason that the rest of the system was built in the first place.
Tools Databases, integration software, programming languages Anything that is used in between the platform layer and the application that is specifically needed because of requirements made by system needs or application needs.
Platforms Operating systems, networking software, storage devices The infrastructure of hardware and software that is required to collect, manipulate, and distribute data, but which is also not specific to the type of data.
For more than four years now, we have been arguing at Briefing.com that the technology industry has been maturing. That maturation started with the platform domain in 2000/2001 and progressed into the tools domain in 2002/2003. In 2004 and 2005, the application layer has begun to mature.
Over time, we have argued, value will be eroded from all companies, both software and hardware vendors, in the platform and tools layers.
Value will continue to accrue at the software application level for enterprises, however. Those companies, provided that their application becomes a crucial part of the enterprise's daily operations, will be able to retain pricing power.
A multi-part series on the maturation of the software industry was run in September 2004, when we divided all software companies in the enterprise software universe into these three domains.
We also argued that the largest enterprise software companies, most of whom specialized in the platform or tools layer, would begin to acquire enterprise application software companies. Oracle was the first to do so, but the acquisition of application software companies is far from over.
We again ran a multi-part series on the consolidation of the enterprise application software industry in January of 2005, where we picked Hyperion Solutions (HYSL), Business Objects (BOBJ), and Witness Systems (WITS) as our candidates for acquisition.
To access prior columns in the Briefing.com archives, select the Archive link from the top right corner of the most recent column. This will display a list of all prior columns, by date. The title of each column is a link to the full column.
Sun's Changes Now
Sun's history has been at the platform layer.
The company was built on the sales of workstations and the Solaris operating system. Both of these products are platform products at the very bottom of the computing infrastructure.
Sun's efforts in the past five years have all been on products that are also at the platform level. Yet, during this time, Sun's revenues have continued to decline and shareholder value has eroded.
Despite the widespread success of Java, for example, which is now a worldwide standard on the internet, Sun has been unable to monetize that technical success into shareholder value.
The real problem has been that Sun has stayed firmly in the platform level of technology.
Sun's Changes Now
The acquisition of SeeBeyond for $387 million and of Storage Technology (STK) for $4.1 billion, have one thing in common: both help Sun move up to the tools layer of the technology value pyramid.
Storage Technology will allow Sun to have more presence at the tools layer. Storage is one of the few sectors of the tools layer were sales are still fairly strong, driven by increasing data storage and distribution needs. However, pricing power is continually eroding as storage is now an established commodity.
SeeBeyond is also at the tools level, but is closer to specific requirements from applications. SeeBeyond products provide a standardized interface that allows data sharing between disparate applications and systems. Although SeeBeyond has a strong technical reputation, sales have declining in recent years and are far below the peak levels of $190 million in 2001.
The acquisition of both companies is a clear statement that Sun has shifted its strategy in an attempt to become more prominent at higher levels in the IT pyramid.
Confirmation Of Value Accruing Upward
Sun's move, along with many recent acquisitions in the IT industry, confirms the idea that value will accrue at the highest levels of the IT pyramid.
Unfortunately, companies like Sun cannot immediately move to the application level from the platform level. Acquisitions of tools companies, like SeeBeyond and Storage Technology, only postpone the erosion of SUNW value.
In the long run, software companies must gain presence at the application level.
Sun's acquisitions, therefore, provide little reason to become optimistic about Sun's long term future, from an investor's perspective.
Our Enterprise Application Picks
In January, we picked HSYL, BOBJ, and WITS as our picks for acquisition candidates in the enterprise software space.
The methodology for those picks was driven by the idea most of the major technology companies have little presence at the application level and must buy, rather than develop, enterprise applications.
We will review the status of those picks in an upcoming Ahead of the Curve column.
Comments may be emailed to the author, Robert V. Green, at rvgreen@briefing.com
Sun Microsystems (SUNW): June 28, 2005, mid-day: $3.74 +0.05 (+1.4%)
SeeBeyond Technology (SYBN): June 28, 2005, mid-day: $4.26 +0.98 (+29.8%) |
