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Big bucks splashed on buyouts, but analyst business foundations remain firm

Consolidation has been a reality in the technology research business for the five-plus decades of its existence, but the billions of dollars splashed out last month in deals involving the two largest players – Gartner and International Data Corporation – have thrown a spotlight on the future of the business.

Neither deal was particularly surprising.

Gartner has always been acquisitive, and peer networking company, Corporate Executive Board (CEB) had long been rumoured as a potential target. The $US2.6 billion in cash and stock (plus $US700 million in debt) which Gartner offered in early January was, however, enough to make many folks in the technology business sit up and take notice.

Meanwhile, International Data Group – parent company of IDC – had been on the market for several months after the McGovern family decided to exit the tech publishing and research businesses to invest in their late father Pat’s deep interest in brain research.

Terms of the deal weren’t disclosed, but it is believed that the combined bid from two Chinese venture capitalists – China Oceanwide Holdings Group and IDG Capital – amounted to something under $US1 billion. Apparently both firms lodged unsuccessful offers last year, and were encouraged to pool their resources, putting together a winning bid in mid-January.

What makes these deals most interesting is what happens from here.

Gartner and CEB

Gartner has made many acquisitions in the last several years, including well-known tech research firms such as Dataquest, Meta Group and Ideas International. It is extremely good at assimilating acquired firms and in most cases has been successful at rebranding services under the Gartner name, with the original brands vanishing.

However, CEB is not a tech research firm whose services will fit neatly into Gartner’s portfolio. Rather, it is a talent management, peer networking and insights company, with a strong presence in human resources, sales, legal and finance. It is quite likely that Gartner will think long and hard about rebranding CEB as the Gartner name will be less well-known in these segments.

Adding close to $US1 billion to Gartner’s revenues of $US2.4 billion and about 4,600 staff to Gartner’s headcount of about 9,000, this deal is also significantly larger than anything that Gartner has consumed before.

However, Gartner CEO Gene Hall made it clear on last week’s earnings call that the firm will be using all the skills and tools it has developed over several years to drive out costs from CEB, and drive up sales engagement and client retention.

The good news for Gartner is that there is no real conflict in the offerings from the two firms, which means no confusion about subscription renewals moving forward. Longer term, the gains will come from consolidating back office functions and real estate, streamlining CEB sales & retention processes, adding functionality to CEB services (think advisory…), broadening the services portfolio for both sales teams, and building new services for new markets.

Hall confirmed last week that the deal has received US anti-trust approval, so there is little likelihood of it not proceeding, and Gartner teams are already hard at work aiming to close the deal in April.

Combined revenues will start to approach $US4 billion this year, allowing Gartner to further dwarf its dwindling group of competitors of any size and substance. But realistically, it will take 12 to 18 months to properly assess the impact of this acquisition on the technology research business.

IDC and the China connection

The founder of IDG, Pat McGovern, had a lifelong interest in China and was the first western publisher to establish a joint venture there as relations thawed in the 1980s, so it is perhaps appropriate that Chinese venture capitalists are the new owners. Indeed, the minority partner – IDG Capital – traces its roots back to McGovern’s first investment activities in China, when he partnered with Hugo Shong, now head of IDG Capital.

With the deal receiving US foreign investment approval before it was announced, this is a done deal, and mostly it represents upside for IDC, which is generally considered the more valuable property as the tech publishing business has struggled in recent years.

First and foremost, the announcement provides certainty for IDC. Ever since word leaked last year that it was on the market, there has been a degree of discomfort in IDC and among its primarily tech vendor clients. It is doubtful that that had any material impact on IDC’s sales, but it could have if the process dragged out much longer. The new owners also confirmed that long-time CEO Kirk Campbell would remain in charge, suggesting that other management changes are also unlikely.

Second, it positions IDC as an acquirer for the first time in many years. IDC has focused on organic growth and hasn’t made a significant acquisition since bringing in Meridian as the basis of Financial Insights over a decade ago.

The new owners have pledged funding for acquisitions, and IDC executives are actively exploring opportunities, many of which are no doubt also on Gartner’s radar – that firm has dozens of opportunities in view at any one time, and will sometimes wait years until the timing and pricing are right.

Short term, the buyout will have no impact on IDC’s portfolio or its sales activities, although it is likely to increase focus on driving up sales. The new owners are venture capitalists, and will be looking for a return on their investment.

The deal has attracted some criticism and negative commentary. Oceanwide is an investor in Chinese computer manufacturer, Lenovo, leading to suggestions of conflict of interest. Most astute observers think that is drawing a long bow – IDC would place its professional and financial credibility at extreme risk if it was even rumoured to be influenced by such a relationship. Indeed, Silverlake Partners, a US venture capital firm funded by Microsoft’s Bill Gates and Oracle’s Larry Ellison – among others – was once a significant shareholder in Gartner, but that didn’t stop them becoming involved in many battles over market data and opinion.

There is also a somewhat bizarre attack ad from Canalys, a UK-based firm which competes with IDC in the market share space for volume products such as notebooks and smartphones. The ad raises questions about trust and security of data shared with IDC by IT vendors, which is somewhat ironic considering Canalys has a largish research operation in Shanghai, which is generally considered to be the base for much of China’s hacking and cyber espionage activities.

Like the Gartner/CEB deal, the impacts of the IDC buyout are unlikely to become clear for at least 12 to 18 months, and while IDC remains the second-largest player in the tech research business, the change is not going to shake the foundations of the industry. Any changes are likely to be evolutionary rather than revolutionary, which has pretty much how things have been at IDC for some years.




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