Tech Industry Analysis

New Research: MGI Scorecard - Large Systems Vendors Oct 2011

New research published: "Large Systems Vendors Scorecard: October 2011"  @mgiresearch #IBM, #CSCO, #ORCL, #EMC, #Dell, #HPQ, #VMW, #BRCD, #NTAP, #JNPR

Our current, October 2011 vendor scorecard provides a qualitative rating for large systems vendors such as Hewlett-Packard, Oracle, Dell, IBM, EMC and Cisco. The note contrasts these ratings with quantitative MGI Index scores measuring business model efficiency and with growth and valuation parameters. The recent upheaval at HP provides an interesting backdrop to our rating scores. With a drop in HP stock, a number of analysts and investors have been turning positive on the company. We think that such enthusiasm is a bit premature. HP’s stock is cheap for a reason. In a related research note: “Who Benefits from HP Disarray?” we analyze the opportunities and threats for HP and its peer group.

Other recent MGI Research reports include:

Is Manhattan Associates an Acquisition Target?

Getting the Right IT Deal: A 20 Questions Interview with a leading IT contracts guru

CIO Critical Success Factors: Conversation with Martha Heller, a noted CIO recruiter

 Visit www.mgiresearch.com for additional information. To schedule analyst appointments, call +1 (888) 801-3644

New Research: Who Benefits from Disarray at HP?

New research published: "Who Benefits from the Disarray at HP?"

@mgiresearch #HPQ, #Dell, #IBM, #ORCL, #EMC, #VMW, #CSCO #Cloud

HP customers, investors and business partners are beginning to feel like they are stuck in a bad remake of the movie "Groundhog Day". In the film, Bill Murray's character is stuck in time and keeps waking up to face the very same day, with the same challenges and problems.

Three of the last HP CEOs were forced out under some sort of a cloud (not the computing kind). After expelling Carly, Mark and Leo (these sound like hurricane names), the board rushed to hire Meg Whitman as CEO and appointed Ray Lane as the executive Chairman. The new team has a big mess to clean up.  The Personal Systems division decision is likely to be reversed. The idea to get out of the PC business was probably not a bad one, but HP is totally unprepared for such a non-linear move. The Autonomy deal will likely go forward, but the acquisition better work, - HP has had a terrible track record of absorbing companies. The EDS purchase caused serious indigestion, and HP inherited a number of contractual issues with it. The list of HP acquisition orphans is long and unmemorable (except for high purchase prices).

In the meantime, competitors are circling the weakened HP turf. We believe, the company still has some time and room for maneuver, but a recovery will require signs of sure-footed, thoughtful, strategic decisions, - so far we have not seen any evidence of that, but one can hope...

In the new research report on HP, we dissect HP's current situation, assess chances for a sustained recovery and risks of market share loss to competitors in key areas such as processors, storage, software and services. 

Other recent MGI Research reports include:

Is Manhattan Associates an Acquisition Target?

Getting the Right IT Deal: A 20 Questions Interview with a leading IT contracts guru

CIO Critical Success Factors: Conversation with Martha Heller, a noted CIO recruiter

 Visit www.mgiresearch.com for additional information.

New Research: Getting the Right IT Deal - 20 Questions with Joe Galuszka

New Research: A significant amount of time, money and effort is spent in the evaluation, selection, negotiationand acquisition of technology assets. In spite of all of this effort, many companies chronically over-pay for those assetsand sign sub-optimal contractual agreements. Andrew Dailey of MGI Research recently conducted an in-depth interviewwith Joe Galuszka, a widely recognized expert in the area of IT Contract Optimization, Joe works directly with CIOs and CFOs to assist them in maximizing their negotiation leverage and achieving additional cost savings and advantageous contract terms and conditions. He has over 25 years of experience in the IT industry, and Joe’s negotiation experience spans both client buy-side and vendor sell-side engagements.

New Research - Google Buys Motorola Mobility - Bullet Train or a Train Wreck?

Google Buys Motorola Mobility: Bullet Train or Train Wreck?

20 Questions with Tony Leng on CIO Success in the 21st Century

In a new research report (http://bit.ly/ihyzrk) published by MGI Research, Tony Leng - a leading CIO executive recruiter with Hodge Partners, defines key success factors for CIOs and how CIOs can position themselves for top non-IT jobs within a company.

New Research Report - "Cloud Computing: A Definition" http://bit.ly/gTha6B
Separate cloud computing facts from fiction. Get insight into new opportunities in the emerging cloud computing landscape.

Replacing Mark Hurd - Hewlett Packard's CEO Search List

August 10th, 2010                 © 2010 MGI RESEARCH, LLC

The task of replacing Hewlett Packard's just-departed CEO Mark Hurd won't be easy. With revenues of $120 billion, HP is the largest IT global provider of IT hardware, software and services in the world. During his tenure as CEO, Hurd had more than doubled the market capitalization of the company, and launched a number of major initiatives - many of which are incomplete. As we highlighted in a companion piece (see MGI Research "Departing CEO Hurd Leaves Hewlett Packard Shares Dead Money", the company is in good financial health, as evidenced by its strong MGI-X score of 2220. The incoming CEO needs to bring a breadth of skills appropriate to the job - and herein lies the challenge for the CEO search committee of Hewlett Packard board of directors.  

The Requirements

Here's a summary of the key requirements for a candidate to be considered:

• A successful track record of running a $20+ billion business. 
• An individual who is both experienced with and is well-respected by institutional investors. HP needs to recover almost $9 billion in lost market capitalization due to the fallout of Mark Hurd's departure.
• Understanding of complex technology or industrial businesses - experience with enterprise computing and large corporate and government sales environments preferred.
• Experience with large M&A transactions. HP needs to make the EDS integration a success. This remains an unfinished question mark and past HP buys (both before and during Hurd's tenure) have had mixed long-term positive results, to state it mildly.
• Track-record in driving financial performance, with a preference for stimulating innovation and building new revenue streams. 
• Vision to leverage HP's position as the world's largest enterprise technology supermarket into compelling high-margin, high-growth product and category excellence.
• Outstanding personal leadership skills - vision, charisma, energy, competence, and integrity.
• Age- in a perfect world, the board would like a relatively young executive who could lead the company for five years+.  However, it's conceivable that the board would hire an older caretaker candidate who could manage the company through the next 3-5 years with no expectation of staying longer than five years.

The Dow 30 List of Potential Candidates

Executives out of one of these companies in the Dow 30 would bring necessary management breadth and depth, complex product lifecycles, sophisticated sales and contracting landscapes, M&A deal-making and integration experience (nota bene - Lockheed Martin is not in the Dow 30, but close enough to be considered). While the IT industry may be different than others, we believe that any complex industrial product/services company with revenues greater than $30 billion provides ample training for an executive to provide effective leadership to a large IT company.  Ford CEO Alan Mullaly exposed the myth of the single-industry experienced CEO. His retort to those who dismissed his lack of automotive industry expertise was direct - "I don't know the auto business, however I'm accustomed to delivering a product that flies 500 m.p.h. at 40,000 feet, has an operational life of greater than 25 years, and is made of more than 600,000 parts manufactured by suppliers around the globe." Senior executives from this list of companies are likely to have the right stuff - and depending on the individual, could lead HP into the next decade.

• AT&T
• Boeing
• Cisco
• GE
• Intel
• IBM
• United Technologies
• Verizon
• Lockheed Martin

The Dark Horse Candidates

• Ray Lane, partner, Kleiner Perkins (KPCB). Billionaire Lane is credited with having built Oracle's robust consulting division and transforming the company into a process-driven machine. As COO of Oracle, he helped scale revenues from $1 billion to $10 billion, and was widely respected on Wall Street.  Although he is local to HP's headquarters, it would take a hard sales pitch to lure Ray back into the day to day operations and travel grind required to run a global business.
• Accenture - there may be one or two partners inside consulting firm Accenture who could bring the organizational and leadership skills necessary to run HP.  
• Tim Cook, Apple.  Well-respected Cook has been a loyal Apple insider, and is recognized for his steady hand on the rudder through the tumult of Apple founder and CEO Steve Jobs' health issues (not to mention Jobs' famous temperament). With the Apple CEO-slot within reach, and the opportunity to be #2 at the most innovative company on the planet at present, Cook is a long-shot candidate.
• Safra Catz, President, Oracle.  Catz has been Ms. Insider to Oracle CEO and founder Larry Ellison's Mr. Outsider. With Ellison showing no signs of letting go of the reins anytime soon, Catz may not get a shot to run Oracle, and the CEO position at HP could be a tempting challenge.  She brings the full package - having served as Oracle CFO, led numerous acquisition and integration projects, has a thorough grasp of corporate and government IT buyers, and a laser-like focus on profitability and shareholder value. HP shareholders could be richly rewarded by a leader familiar with Oracle's operating model and valuation metrics.

The Insider

Todd Bradley, age 51. Of the current crop of HP executives, only one appears to us as possessing an attractive mix of skills, management breadth, strong health, and capable of passing most, if not all, of the requirements listed above.

Bottom Line

The board of directors of Hewlett Packard is now confronted with the reality of its decision to negotiate the exit of Mark Hurd - namely the unenviable job of finding a new CEO. HP has a huge carrot to dangle in front of potential hires - the biggest job in IT today. Finding someone willing to engage with HP given its past decade of CEO and board shenanigans is a tall task, not to mention the challenge of finding an individual with the panoply of skills required to succeed in the job. 

Departing CEO Hurd Leaves Hewlett Packard Shares Dead Money

August 10th, 2010                           © 2010 MGI RESEARCH, LLC

The sudden departure of Hewlett Packard CEO Mark Hurd amid ethics issues pushed HP stock down about 10% after the Friday market close. Over the weekend and early on Monday, Barron’s and several sell-side analysts called the sell-off a buying opportunity and HP shares traded up in early trading on Monday, they ended up losing $3.40, losing 7% and closing at $42.60.

We do not believe investors should be jumping into HP shares right now. Mark Hurd’s presence at HP added $3-4 per share in value based on his focus on operating performance, cost controls, metrics and continuous improvement. During his tenure HP has significantly increased its operating efficiency as measured by the MGI Index. HP's MGI-X score of 2220 compares very favorably to IBM's MGI-X score of 1634. This translated into almost $45 billion in added shareholder value within the last five years. Hurd is leaving HP in the midst of several unfinished initiatives – many of them strategic in nature. The integration of EDS is not complete and has had a number of bumps including disputes with large clients around the world. HP acquisition of PALM was supposed to propel HP into the mobile Internet field. In the consumer space, HP has been facing some product and support quality issues. In the server space, HP has been a solid performer but is facing stiff competition from Oracle/Sun, a resurgent Dell, and the expected arrival of Cisco in the space. HP software initiatives have not turned HP into a serious enterprise software player. The good news for HP and its interim CEO is that the sales pipeline, at least in the short term, is unlikely to be effected, as customers and prospects ready to sign deals with HP won't be moved by a change in leadership.  Heading into the teeth of the all-important Q4 IT spending period, HP's near term revenues will not be effected by Hurd's hasty departure.  Operationally, HP has a deep management bench that can clearly enforce established business practices.  The leadership uncertainty of the next few months could hardly be positive for shareholders or the stock. In our view, until a new CEO is selected, HP shares at best will look like “dead money”.

The Intel Anomaly and the 2H Outlook for Tech Sector Spending

July 22, 2009  © 2009 MGI RESEARCH, LLC

What the Press and Analysts Missed in Intel's Q2 2009 Earnings Call

The strength of Intel’s management and operating expertise was highlighted once again in the 2Q results. Intel (INTC; MGI-X: 2,048) took specific and significant corrective actions to adjust for very tough market conditions, to the delight of press and analysts alike.  What do Intel’s results (and commentary) say about its management team, companies with high MGI scores, and the overall outlook for tech spending for the rest of 2009 and 2010?

Beyond the heaping accolades after their 2Q09 earnings call on Tuesday, July 14, 2009, three things stand out, and went notably under-reported.  First, after several quarters in which revenues fell dramatically (from $10.2 billion in Q3 last year, to $7.1 billion in Q1 of this year), Intel managed to perform well on multiple fronts: it eliminated 2,000 employees  (approximately 2% of total employees) and part of a continuous effort to streamline operations, the sales force delivered above (much reduced) revenue expectations although ASPs were down, and R&D programs remained on track.  Not many companies can simultaneously cut their workforce, execute in sales and marketing with pricing under pressure, and maintain an intense focus on R&D all in one 90-day period.  There is a reason Intel’s management has consistently outperformed its peers.  Intel’s MGI scores, a measure of management effectiveness and overall corporate efficiency, have always been significantly better than competitors like AMD (MGI-X: 650).  Companies with high MGI scores tend to strongly outperform their market.  CEO Paul Otellini is proving he is a much more capable executive than “just a sales and marketing guy” as some cynics sniped when he was elevated to the CEO position.  Further, the high MGI scores and impressive results of the second quarter attest to Intel’s culture of sound management.  Intel is the rarest of IT companies that is on its third generation of executive leadership, and is long past the days of being led through the force of a single personality or founder. INTC’s high MGI scores have stood the test of time and successive management teams. 

The second under-reported highlight of the earnings call was management’s quotes on IT demand through this year and into 2010.  Specifically, Otellini said,”we are not out there thinking that there’s a recovery to prior levels in the aggregate.  In terms of the enterprise, I actually, -- we are not planning for a refresh this year.”  He went on to say that while he sees a refresh coming at some point given the aging of corporate desktops and servers, “we’re not counting on that happening in large measures in 2009”.  An additional comment on overall demand was, “you can’t lose sight of the fact that there is still a lot of economic volatility out there.  We still see a weak enterprise market…” While press and analysts are eager to report the glass being half full, a sanguine observer would simply note the fill level of the glass – the demand picture is unclear, and Intel management does not see obvious demand drivers for the rest of this year, and into 2010.  Separate from the INTC commentary, our research indicates that the historical refresh cycle may be fundamentally broken.  Most companies have abandoned the 3 or 4 year refresh of PCs and servers, and are simply replacing machines as they break.  Further, there is little evidence that Windows7 will be a demand driver like Windows95 or WindowsNT was in the Glorious 1990s of tech. 

Finally, a third observation on INTC is what an exception Intel is.  Few companies command the global market share that Intel does. It’s no wonder some consider it to be a monopoly/oligopoly.  This unique position gives Intel the enviable ability to price aggressively and optimize margins across its product portfolio – and puts more wind in Intel’s sails even with light demand.  Intel also competes in a broad array of market segments and in every geographic region of the world. This allows it to benefit from things like the stimulus spending in China – something management referred to in the call. Not many companies have the product breadth and geographic reach of Intel.  HPQ, IBM, and Oracle come to mind, but none of them has the market dominance of Intel.

The bottom line is that INTC delivered a solid Q2 – as befitting a high MGI scoring company.  Companies with MGI scores above 2,000 are more likely to perform well against their lower MGI-rated competitors.  One should use caution in reading too much into the Intel results. As exceptional as Intel is, management’s muted comments on tech recovery is telling – strong signs of IT demand drivers for the rest of 2009 have yet to emerge.  As a final point, our updated MGI scores for the June quarter will be available once the company files its quarterly 10Q with the SEC.  Given our initial review of the results we hope to see some improvement in the MGI scores, however, one of the advantages of MGI’s quantitative model is that it helps identify and isolate specific strengths and weaknesses of the results that are not necessarily visible at first glance – so we will withhold our final view until we see the scores.

SAP-Teradata Announcement Reflects Pressure on SAP vs. Oracle

April 28, 2009  (c) 2009 MGI RESEARCH, LLC

The recent SAP-Teradata announcement that SAP's BW (Business Warehouse) will be ported to Teradata (NYSE: TDC; MGI: NR) comes only one week after Oracle's public bid to acquire Sun Microsystems. The press release was light on details - e.g., shipment dates, channel issues, scant mention on either company's website, and in the short term was of greater benefit to Teradata, which extended its ability to re-sell the SAP/Business Objects BI products.  Given the tactical nature of the announcement, and the practical reality that it will be at least 6-9 months before customer beta testing of the SAP/Teradata combo, MGI Research sees minimal short term benefit of the announcement to SAP, and minor impact to IBM or Oracle.  In the bigger picture, the event highlights the tectonic shift that will occur if Oracle (Nasdaq: ORCL; MGI-X:2,314) closes the Sun (Nasdaq: JAVA; MGI-X:656) transaction. We re-iterate our view that HPQ or IBM are likely bidders for SAP within the next 24-36 months.   

Absent from the announcement was any reference to a deal around demand forecasting - a known weakness for SAP, particularly in retail and in spite of its Khimetrics acquisition, and a relative strength for Teradata.  The lack of any news means the expected Teradata/SAS (private; MGI-X: NR) partnership may still go forward. 

The deal underscores the emerging reality that Oracle will effectively distance itself from SAP, and now compete head to head with HP (NYSE: HPQ; MGI-X:1,822) and IBM (NYSE:IBM; MGI-X:1,769) if it finalizes the acquisition of Sun.  HP's relationship with Oracle will cool, and the HP/Oracle Teradata-killer product ("HP/Oracle Database Machine") is likely relegated to the junk heap of joint development projects. Oracle's strong MGI scores through 30+ acquisitions large and small points to its ability to innovate through acquisitive growth combined with operational efficiency.

For a company that historically possessed tremendous strategic vision and world-class execution, SAP increasingly looks tactical and lacking a coherent strategy.  SAP abandoned Cognos as the two companies were working joint go-to-market efforts when SAP launched its bid for Business Objects, pushing Cognos into the hands of IBM.  Global 2000 CIOs are eager to reduce their supplier base, and without a broader product set or a clear edge in innovation, SAP is at risk of losing its seat at the table of industry leaders inside the enterprise.

MGI Research believes IBM is an innocent bystander in this announcement - neither benefiting significantly from it, nor feeling any pain from SAP/Teradata announcement-ware.

Bottomline: The SAP-Teradata announcement does little to alter the rapidly changing industry dynamics in which Oracle is emerging stronger than ever, with impressive MGI-X scores, and SAP is playing a reactionary game in which it is unclear if it can or will compete via acquisition or internal development.  If Oracle is successful in integrating Sun (and it maintains ownership of the hardware assets), IBM and HP will be under pressure to make a run for SAP - a logical combination for both companies. Teradata may be a tuck-in acquisition for a larger player, or more likely, simply an industry orphan with a robust installed base and maintenance revenues.