It’s been a good time to be a corporate marriage counselor, and an even better time to be a corporate divorce attorney. Just in the last two weeks, we learned that eBay was spinning off PayPal into its own company, HP is going to split up its consumer hardware and corporate services into separate companies, and Symantec will cut itself in half as well.
Like two embittered high school sweethearts who later learn that things aren’t working out well together, these companies seem genuinely excited for life after independence. Certainly Wall Street investors are excited, with all three stocks moving up on the announcements, and eBay in particular jumping 7.5 percent. Ditto for the lawyers and bankers, who will receive a boatload of fees for using some scissors on the corporate org chart.
But the excitement over these splits belies a deeper question: When did size become such a weakness? Just a little more than a decade ago, HP and Compaq agreed to merge, creating one of the largest technology companies in the world. Around that time, Microsoft was fighting the final throes of its antitrust battle with the Department of Justice, trying to avoid being split up. Just a few months later in 2002, eBay agreed to acquire PayPal in one of the largest startup acquisitions in the post-dot-com era.
Size, though, just doesn’t have the same relevance anymore. There used to be enormous benefits to being bigger in the technology field, particularly when it came to sales. Companies like Microsoft, HP and Cisco rely on strong, deep and constant relationships with corporations and governments around the world to sell them software licenses, hardware products and services. These sales often come in bundles with long-term contracts, providing huge sales leverage to these companies, who can ensure stable revenue for years while also blocking competitors and startups from getting a sales foothold.
But the whole notion of a “Microsoft shop” is declining. Companies, pressed to find ways of controlling IT costs while building additional capabilities, are more willing than ever to consider multiple vendors in their procurement processes, and are also more wary of software licenses and long-term maintenance contracts than in the past.
Perhaps even more importantly, the software-as-a-service movement has made important inroads into the Fortune 500, which has created not just competition against traditional software licenses, but also a new mindset among CIOs. They are much more concerned about purchasing all of their services from a single vendor today, aware of the pitfalls of vendor lock-in. It shouldn’t be surprising then that as their long-term contracts come up for renewal, these purchasing officers are beginning to look at new options to meet their needs. The sales leverage that comes from being huge has declined, and in fact, may even be a liability today.
Large also used to mean easier financing and lower cost of capital. Unlike startups and smaller corporations, the largest technology companies have traditionally had enviable access to the debt markets, allowing them to raise relatively cheap money through corporate bond issues. That cost of capital dynamic meant it was relatively inexpensive to start new product lines or quickly scale up a division when demand warranted it.
A diversified product portfolio also used to be a huge advantage in weathering technology change. The profits from cash cow legacy products could help to subsidize investments in the next-generation set of products and services. HP, for instance, makes billions from its printer business, and that money can be used to finance a range of innovation in areas like cloud services. In addition, size also helped these companies handle recessions, when revenues from different business lines could be aggregated and distributed to avoid massive disruption to the business.
These competitive advantages have waned as startups have gained easier access to capital. Bonds and other forms of corporate debt may still be better than late-stage growth equity, but it is clear that startups are no longer in a rush to get to the public markets, as the number of $1 billion startups reaches a new record. And despite what corporate strategists have hoped, size hasn’t really helped companies in downturns. HP alone has laid off tens of thousands due to a tougher business environment and previous recessions.
The conglomerate model of a cash cow with an economic moat around it will still exist of course – one just has to look at Google, Apple, or Facebook to see this in action. But when it comes to the enterprise software space, it definitely seems to be on the way out.
Ultimately, enterprise companies are experiencing what consumer companies have dealt with for years: velocity. As long-term sales contracts decline and cost of capital goes down, enterprise startups have more chances than ever to get their product in the hands of customers. Size still has some advantages, but the major disadvantage is the inability to move at the velocity at which the industry is developing. Just take a look at PayPal, which remains one of the largest payment processors on the internet, but has lost mindshare to fast-moving upstarts like Stripe, Balanced, and Braintree (which it acquired a little more than a year ago).
In short, large is no longer the defining quality most companies are seeking. Today, the market demands products faster than ever before, with greater flexibility in purchasing agreements. That requires a more efficient organization with fewer lines of communication to ensure that ideas don’t get stuck in endless meetings while startups zoom ahead with their competing products. The strategies that worked in the 1990s and into the 2000s are no longer the strategies that will ensure growth for these technology companies today.
With three major splits in just two weeks though, the question is: who is next? Microsoft itself is going through a period of layoffs and restructuring, but what about companies like VMWare, Cisco, Oracle, and SAP? Time will tell if they watch the neighbors and see love through divorce. Certainly the attorneys and bankers are already drawing up the paperwork and getting their scissors ready.
