Bigger company got better edge

May 11th, 2005

Software industry in the US has several big acquisitions recently. Oracle buys Peoplesoft (merged cap 60B). Symantec (Cap 13B) buys Veritas (Cap 8.6B). Adobe (Cap 14.1B) buys Macromedia (Cap 2.8B). Suppose the merged cap doesn’t shrink after acquisition (though not likely), the new top software companies will be

Microsoft (269.1B)
Oracle (60B)
SAP (50.3B)
Symantec (21B)
Adobe (17B) / Infosys (17B) / CA (16.4B)

Some big players also in software arena

IBM (118.3B)
Google (63.4B)
HP (59.5B)
Yahoo! (48.71B)

I think the reasons why bigger companies get better edges are:

1. In the US, bigger companies can attract job seekers by better benefits. After the Internet bubble in 2000, job seekers are more conservative. Big companies with better benefits will be more competitive than start-ups with great stock options but less benefit in the hiring arena. (If you’ve paid health insurance in the US, you shall know what I am talking about.) For those foreign workers or students who hold or wanna apply H-1B visa, bigger companies can provide better financial support for the green card application (suppose no lay-offs happened). 
2. Companies listed above got billions of cash. If you have billions of cash, will you stay at home instead of going out shopping something? I don’t think so. What is the best merchandise a company can buy? Of course it’s competitors’ companies!
3. From the numbers above, we can see there’s only one word to describe Microsoft: Monster. When the monster is trying to get its hand over your field, what should you do? The best way out there is to buy some more ammos and try to win the war. Peace after winning the war will be much more rewardable than losing it.
4. The complexity of building software today is much higher than five years ago, and we can see the complexity will grow following Moore’s law. Increase in complexity implies increase in cost. However, software prices are not raising because of the concern of keeping market shares, which means lower profit rate. According to Taiwanese experience, the only way to survive this hostile environment is to effectively lower your cost. Acquisition is an effective mean because a successful acquisition can maximize the utilization of infrastructures and cut unnecessary HR cost.
5. Killer applications are harder and harder to find. Most start-ups are funded by ventual capitals. It’s easy to tell if a start-up has killer ideas after two or three years. Buying companies this type costs 2M ~ 10M. However, form a team inside a big company to experiment some idea is not a mere 10M thing after three years, not to mention the risk that must be taken. As a result, acquisition provides an attracting alternative for lowering risk and faster time to market.

Does that mean start-ups have no chance? Yes they do. Ventual capitals are not idiots, and they don’t spend their money like a fool. It’s damn hard for start-ups to become rock stars. To be the second Yahoo!, or another Google, solid technology background, management capability, market insight, and extreme luck are all must-haves.

Reviews & Comments | Comments