Category: mergers & acquisitions

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Whatever happened to the railway?

Have you noticed how no-one talks about the railway any more? From BBC downwards, the place where you catch a train is now a train station, not a railway station. In other words, we talk about the vehicles, not the system. And the problem with that is that we’re getting a worse service and it’s costing us a lot more.

The reason why we’ve lost the concept of a railway system is clear: there is no system any more. Since the rushed, ideological privatisation of British Rail in the dying days of the last Tory administration, the railway has been run by train operators, such as Southern or First Great Western, and an infrastructure operator, Network Rail. Within each of these two broad groups — train and infrastructure operators — there are further schisms, such as train leasing companies, train refurbishment companies, track maintenance companies, signalling and telecommunications etc etc. The list goes on.

Railways are inherently complex organisations: they’re subject to disruption by all sorts of events, most of them not entirely or at all under the railway’s control. People fling themselves off platforms in front of trains, hardware wears out or fails before its time, external electricity supplies go down, weather results in key personnel — think train drivers and signalmen — being unable to get to work, and so on. You can imagine.

At the best of times, for a system such as a railway to work effectively it needs communication between the various elements. In the days of a single railway organisation, it wasn’t perfect but at least everyone was working for the same employer and could be orchestrated as such.

Today, that is no longer the case. Each organisation has a profit motive first which means there has to be a cash incentive to make something happen that’s out of the ordinary. Usually, that works to the disbenefit of the rest of us. For example, you want to make a train connection but your incoming train is 10 minutes late. In BR days, the connecting train might well have been held for the benefit of the arriving passengers. No longer. There’s a financial penalty for train operators if they are late so today you can happily watch your connecting train drive away as you arrive at the station.

Another classic example is a small incident that happened in July 2011 at the entrance to Edinburgh Waverley station. A train derailed but it was a slow-speed incident, the train stayed upright, and no-one was hurt. In BR days, a crew would have been out to to jack it up and get on its way, and make overnight repairs to the track. In this incident, before the train could be moved, there had to be a full investigation to find out what had failed in order to establish who would pay for the damage. This meant that, instead of there being a delay of perhaps an hour or three, it took a day and a half before Edinburgh was fully open for trains again.

Given that, you can imagine what happens when one railway company needs to contact another in an emergency. Something has gone wrong and it needs to be sorted out, as passengers are stranded in the middle of nowhere. Since the profit motive comes first, the various parties have to talk about who will pay, who is at fault and therefore potentially liable, and whether it’s worth fixing now or later. That’s before they get around to talking about how to solve the problem. Meanwhile, passengers sit in trains for hours.

This is not a hypothetical problem: it’s happened plenty of times. Yes, we’ve had some nice new trains following privatisation. We’ve also had beyond-inflation price increases every year to pay for them — and for the huge profit margins the trains companies demand before they will get involved, even though their profits are underwritten by the government — that’s you and me.

Privatisation of the railways has been a disaster overall. We’ve lost the concept of a railway system, and replaced it with a patchwork of train operators’ turfs, each of which doesn’t connect, and results in a blizzard of confusing ticket prices as they attempt to segment the market and screw more cash out of the customers (we’re no longer passengers). Woe betide you if you miss a train, even if it’s not your fault, as the mega-prices are backed up by penalties if you don’t get exactly the right ticket.

As my good friend John May sings: it’s time for a change.

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Time to end loyalty card schemes

Am I alone (distraction: how many rants start like this?) in thinking that few of the trappings of the modern world are as annoying and deeply insidious as the loyalty card? Every shop in the high street offers one, it seems, so it can’t be a bad thing, or they wouldn’t get away with it, would they?

“Do you have a loyalty card,” they twitter. I’ve just encountered the final straw – hence this posting.

On the face if it, what’s not to like? You give the organisation your name and address, they send you a card, and you get a percentage point or two off your shopping. In these hard times, many a mickle makes a mackle.

But they never tell you the whole story. They will never come out and say that, if you subscribe, the company will bombard you with offers that, based on your spending patterns, they think you will want. Well, maybe you will, maybe you won’t, but would you rather not make those choices at a time of your own choosing, under your own steam as it were, rather than being manipulated by some marketing droid or, worse, by some marketing algorithm deep in a data centre somewhere?

If those cards weren’t worthwhile to administer, then companies such as Tesco – feted in marketing circles as among the most successful deployers of such schemes – wouldn’t do it. The reason it’s worth it is not because they get their hands on your spending patterns, which of course they do and which raises other issues – see below – but also because you spend more. Each marketing mailout increases demand for whatever it is that’s being pushed at the consumer.

So whatever discount you’re promised, you’re almost certain to have blown it out by buying more stuff you wouldn’t have bought had the scheme not been in place. That’s more profit for Tesco.

What’s more, the cost of the scheme is offset by hiking prices, as demonstrated by the Morrisons chain of supermarkets which cut prices when it abolished its loyalty card scheme back in 2004. and Asda told the Daily Telegraph it wouldn’t be implementing a scheme because: “It would have cost £60m to set up and £20m to £30m a year to maintain.”

But more fundamentally important is the loss of privacy that these cards entail. As the Telegraph feature referenced above reports, one campaigner likened having a loyalty card to walking around with a barcode stamped on your backside.

What I buy is my business, not that of a marketing programme. The data my buying provides means that more snippets of data about me sit in the public domain, waiting for some future organisation to hoover up and use in ways as yet unspecified.

Those who made this argument ten years ago were shouted down as paranoid. But today, with the growth of huge databases, accessible worldwide, as companies amalgamate and share data, and as basic security issues – such as not walking around with databases on a device liable to either theft or absent-mindedness, such as a laptop of USB memory stick – seem to be beyond either commercial organisations or the government, it behoves us all to hang onto those snippets.

Piled up in one place, a lot of snippets make a profile. Many a mickle makes a muckle.

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Oracle buys Sun — but who really wins?

The big news this week this is undoubtedly the $7.4 billion purchase of the troubled server company Sun Microsystems by database specialist Oracle. But, given the very different nature of the two companies, will it work?

Well-known in the industry for being the favourite of developers and geeks, and among its customers for its high-powered, reliable but expensive systems, Sun has nonetheless suffered financially since the implosion of the dotcom bubble. Its accounts have bled red for years, and selling the company seems for eons — that’s eons in IT years — to have been the only way out.

Just two weeks ago, IBM made overtures to buy the company. This author among others could see that there would be some synergies, although I struggled to see how Big Blue would swallow Sun’s server range, given that it has a well-established and rational product portfolio already. IBM and Sun would have fitted together mainly on the software side, where the acquisition of Solaris, a major platform in the database world, along with Java and many open source technologies including OpenOffice, would have sat comfortably alongside IBM’s espousal of open source, and its conversion from hardware to software and services company.

It wasn’t to be. Sun demanded too much of IBM — more here — and the deal fell through. We wondered at the time how Sun could have let it happen, and accused the Silicon Valley stalwart of greed and complacency.

What we didn’t know was that it had another suitor in the wings, one willing to pay Sun’s pretty substantial asking price.

Early post-purchase signs are good. Most analysts and observers see more positives than negatives emerging from the deal. Oracle is a software company first and foremost, while Sun’s revenues stem mostly from hardware.

What’s more, Sun’s Solaris is a major platform for Oracle’s eponymous database, which means that Oracle can now offer the whole stack, from raw iron upwards, and so is in a better position to offer more tightly integrated solutions. As the company’s acquisition statement said: “Oracle will be the only company that can engineer an integrated system — applications to disk — where all the pieces fit and work together so customers do not have to do it themselves”.

Some systems integrators may suffer as a result, but that’ll be some way down the line, after two or three product refresh cycles.

The deal has even got some of the opposition thinking. As Colin Barker reports from an HP product launch in Berlin (which I was unable to make, sadly): “HP executives thought that the news was interesting and it was not difficult to see their internal calculators trying to work out any options the move would give them.”

So far so fitted.

But big questions remain to be answered. Sun has always been a fairly open company, and has always seen itself and wanted to be seen as part of a wider community. When open source came along, Sun gradually adopted it and, with no little external persuasion it seemed at the time, even made some of its own, expensively developed technology open source.

In complete contrast, Oracle has rarely if ever done that — apart perhaps from its development of its own version of Red Hat Linux, which the market has largely ignored. Oracle’s proprietary approach and eagerness to squeeze every last dollar out of its large enterprise customers is the stuff of legend.

This is unlikely to change, especially now that it can lock down those customers to a tightly integrated hardware platform. The reactions of those customers, of the competition, many of whom are in alliances with either or both the parties to the acquisition, and of the channel remain to be seen.

There will be layoffs too, given the economic situation, and the more obvious lack of need for duplicated sales, marketing or HR departments, for example. One analyst is reported to have predicted up to 10,000 job losses. I would expect the culture shock to squeeze quite a few through the out door.

But if you’re a customer, you might prefer not be locked in. If you’re a hardware partner of Oracle’s, you’re likely to be re-thinking that deal, big time. HP is in that boat, given that it’s co-developed servers for Oracle, in the database company’s first venture into hardware, back in 2008. And if you either work for Sun or are one of the developer community in Sun’s orbit, you might well find yourself wondering where to go next, whether voluntarily or not.

My take is that most customers will stay put. It’s not the time to start launching into expensive new IT roll-outs. That’s not to say that those with an aversion to single-supplier deals won’t bail as soon as possible.

However, the pressure on the competition in the current climate is likely to result in more mergers and acquisitions, and a jungle populated by fewer but bigger beasts.

But who and which? Here are some questions: will IBM swallow EMC? Will Cisco buy Brocade? And could Microsoft finally buy Yahoo!? And how many more yachts will this deal enable Oracle CEO Larry Ellison to buy?

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Where does the Sun-IBM deal failure leave Sun?

So Sun Microsystems turned down IBM’s offer to buy it — even though Big Blue’s $7 billion buy-out bid was twice the valuation of the troubled Silicon Valley stalwart.

We read on Bloomberg that the sticking point was a clause in the contracts of top Sun execs. The news service reports that: “chief executive officer Jonathan Schwartz and chairman Scott McNealy have contracts that mean they would receive three times their annual pay, including salary and bonus, should Sun be acquired.”

IBM reportedly didn’t think too much of that stipulation and would not honour it — even though its acquisition of the fourth-placed server vendor would have boosted its position against number one vendor HP.

We also read that “Sun’s board contended IBM wanted too much control over Sun’s projects and employees before the deal closed”, which is hardly surprising: coughing up $7 billion has a way of concentrating the mind.

And especially when it appears that some super-rich employees wanted to grow even richer than they already are. Top Sun execs get paid in millions of dollars: Bloomberg reports that Schwartz’s salary was $1 million last year and his target bonus was twice that amount. And company founder McNealy was awarded $6.45 million in compensation last year, including $1 million in cash for his “service as an employee of Sun”.

But in this day and age, exactly how much money does one already super-rich individual truly need?

There’s another factor. Even before the recession, Sun consistently failed to show a profit so IBM would be bonkers not to want to manage Sun closely. And Sun looks to be heading for its biggest loss since 2003.

Following its rejection of IBM, Sun’s share price dipped 23 percent, its biggest fall since 2002, according to Bloomberg.

So what are we to learn from this? Chatter among techies in the industry demonstrates tremendous loyalty to Sun and its technology. However, a company selling semi-proprietary kit — yes, I know that Solaris is now open, and that it uses Intel processors and so on, but that’s not where the bulk of its sales are — was always going to struggle now that hardware is commoditised and standardised.

Analysts agree.

“Sun can survive as an independent company, but the longer the recession goes on, the more likely it is the value of the franchise begins to fade,” said one.

“Sun made a horrible mistake. Wall Street analysts probably optimistically expect their revenue to decrease year-over-year for the next several years — they should have just taken that money and ran,” said another.

Is this the beginning of the end for Sun? Industry observers — including this one — have called this before and been wrong. Largely down to the company’s huge cash cache, Sun has continued to trade even as its accounts bleed red.

What’s different this time is that Sun’s top execs seem to have forgotten that we’re in the middle of a recession. It might be because Silicon Valley has its own mental micro-climate. I was there a couple of months back, talking to venture capitalists and heads of startups looking for funding, and the untrammelled optimism was palpable: I almost started sweeping it up off the floor.

But in the real world, there’s near-universal anger and disappointment at the shenanigans of the stupendously well-paid at the heads of companies. Keen to be seen as corporately and financially responsible, IBM is likely to have been sensitive to the appearance of funding what looks like plain greed.

Neither of the two parties has commented on their falling out. But if Sun is to survive, you’d have to hope that hubris doesn’t get in the way of deals with any future suitors.

If there are any.