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Microsoft’s two should-be M&A considerations

Posted on Sunday, Apr 10th 2005

Microsoft has stagnated, much to the chagrin of its investors. The powerful vision of the eighties and nineties – of putting a PC on every desktop – no longer seems like a big, hairy, audacious goal. Instead, they are looking for greener pastures – mobile handhelds, digital homes, internet telephony – so forth and so on. In that effort, Microsoft had also articulated a desire to go after the small-medium enterprise (SME) markets, but at the end of 2004, Microsoft Business Solutions (formerly, Great Plains Software) scored a paltry $667 Million in sales – only 2% of total revenues. Great Plains was acquired in 2001 for $1.1 Billion. In 1995 antitrust concerns had scotched a $1.5 Billion acquisition of personal finance software maker Intuit, a supremely logical candidate for the SME market.

John Madok at Applied Materials suggested over lunch the other day: “How about Paychex?”

Indeed, how about Paychex? It’s at $1.2 Billion revenue, and a $12.3 Billion market cap, so pretty expensive, but just as synergistic as Intuit, and can probably offer great leverage. And it may actually be permissible, even, without an anti-trust issue. Something to consider.

The other good one would be Autodesk. A leader in multiple markets that serve small-medium businesses, from the small time manufacturing shop floors, to the architect’s office. Autodesk is at ~$1.2 Billion revenue, and $7.5 Billion market cap, and services the $20 Billion Mechanical Design (MCAD) and Product Lifecycle Management (PLM) Market, among others. The Manufacturing software market has lots of players, so no anti-trust issues, presumably. Channels are also well-aligned.

A billion here and a billion there … Microsoft can certainly afford to buy some market leading products, especially since their internal engine hasn’t succeeded in producing the necessary winners.

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Heritage Hotels: Roll-up opportunity for a Private Equity firm?

Posted on Thursday, Apr 7th 2005

Spain developed the Paradors concept very effectively, by converting old forts, palaces, and monasteries into beautiful “experience hotels”. India has done only the beginnings of this, but has a very long way to go yet.

Here is a business concept for KKR or Carlyle for India: The real estate market is booming. Old, beautiful architecture crying to be restored, are everywhere. British colonial bungalows in the mountains, hunting lodges in the forests, old aristocratic homesteads in the cities and villages — dwindling under severe resource pressure.

Buy them up, restore them, staff them up with superb local cuisine chefs, pampering personnel (staff costs literally nothing in India), masseurs, yoga instructors, … and you have a franchise that could become a global brand, and a great investment!

Tourism in India: Huge Opportunity

Posted on Thursday, Apr 7th 2005

We were traveling in North India during the holidays last December. We focused mainly on Rajasthan and Varanasi, and our flight to Khajuraho was cancelled. Rajasthan is one of the most popular tourist destinations in India, perhaps second only to Agra and the Taj Mahal. It has enormous and spectacular forts like Amber in Jaipur, Mehrengarh in Jodhpur, and others in Chittaur, and Jaisalmer. In my extensive travels all over the world, I have seen very few monuments of comparable scale and architectural intricacy. The Moorish influenced Alhambra may be the closest.

Rajasthan has done a decent job with tourism so far. Guides are available in many languages (Spanish, Italian, French, German, Japanese). European tourists abound, and hence the industry caters particularly well to their needs. Beautiful old palaces and homesteads have been converted into Heritage Hotels. Food is excellent at most of these. We stayed at Fort Chanwa at Luni village outside Jodhpur, Samode Haveli in Jaipur, and Jagat Niwas Palace in Udaipur. We deliberately avoided the Taj / Oberoi experiences, and chose the more authentic “old-world” ones heavy on charm.

But logistics of getting to these places are still complex, and ridden with calamities. Our 20-minute flight from Jodhpur to Jaipur was cancelled, and instead, we were put on an 8-hour road trip, paid for and orchestrated by Indian Airlines.

During this trip, I made notes for a number of interesting business opportunities.

I know from past experience, traveling in the Himalayas is very difficult still, with long road journeys (Bus, Car) being the only resort. Accidents are common, as vehicles often get tossed down the abysmal chasms alongside the winding mountain roads.

While Sahara and Jet Airways have made travel between major cities vastly more efficient, pleasure travel infrastructure to the exotic and exquisite destinations, sadly, is still pretty pathetic. A fleet of small air-crafts placed in the right tourism routes all over India would be a great addition to India’s tourism development, and is an opportunity waiting for an entrepreneur to take charge of.

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Indian Enterprise Market Sucks

Posted on Thursday, Apr 7th 2005

So far, India’s IT industry has primarily catered to the US market, and secondarily to European and Asian markets. In other words, India builds technology largely in a back-office mode.

Of course, as the market matures, investors get over their fear factor, and the pendulum swings to the other extreme with over enthusiastic investors flocking to Bangalore, Mumbai, Chennai, Hyederabad, Delhi, Pune, and now even Kolkata.

The sentiment, still, is largely focused on opportunities with India as a low-cost production center, less so with India as the end-market.

This will most likely change in the next 5-10 years. However, as it changes, the VCs may very well make the mistake of thinking that the Indian market would mimic the evolution of the US market:

* a) The large enterprises will become the biggest consumers of leading edge, expensive technology.
* b) Small-Medium Enterprises will lag.
* c) Consumers are the trickiest to market / sell to.

Indian enterprise customers are cheap. Very cheap. A direct sales force selling to the enterprise customers will wear out the soles of their shoes before they close a deal, and when they do, the deal will most likely be unprofitable.

If you look at history, one of the most successful “product” companies to have been built in India was Vedika software, a small-medium business accounting tool.

On the consumer side, however, are India’s most exciting opportunities. Education is an obsession for all Indians, especially the middle class. Humongous technology companies have been built in India by serving this obsessive desire to be educated and marketable. NIIT is one of the best examples in IT training.

Other sectors that are just getting organized in India are:

* a) The ready-to-wear garments segment
* b) The media industry
* c) The tourism sector
* d) The packaged food sector

If you are looking at an India strategy — latch on to some of these trends. Don’t try to apply the proven American wisdom, because it is likely to prove that America is not very wise when it comes to investing in India.

Saba, Aussi!

Posted on Wednesday, Apr 6th 2005

Meaning, Saba as well.

The blue-print for Epiphany and that for Saba are quite similar. The space is different, and hence the nuances are different. Saba is about a $35M company, with a $75M market cap and a leader in the Corporate e-learning space.

Enterprise Learning Management Software (LMS) is used to create e-learning solutions, and consist of
-Registration capabilities (curriculum, courses, instructional responsibilities)
-Management of curriculum and courses
-Skills and records management
-Student interfaces to courseware
-Administration (for example, test and assessment capabilities, certification, instructor assignment to the courses, any regulatory requirements and history)
-External system application programming interfaces, including human resources (HR) and, optionally, enterprise resource planning systems.

Saba, Plateau, Docent, Pathlore, and about 20 others make up the deeply fragmented space. ThinkQ was another leader in the space, which was recently acquired by Saba.

This space is ripe for consolidation, as well as a business model reorientation to include a BPO model.

My thesis on online distance learning is that instructor-led models are far more effective than self-service models. I think, to build a large company in this segment, it is essential to understand and appreciate the strengths and weaknesses of the two models.

Question to ask: Is it easier to keep up an exercise routine if you have a trainer?

E.piphany should change its Business Model to survive

Posted on Wednesday, Apr 6th 2005

What does an erstwhile star company, with a stock price now stagnating between $3-$6 and a ~$250M market cap do next? Revenues have fallen from $125M in 2001 to the $80M 2004 sales number. Maintenance and Professional Services account for more than two-third of the company’s sales.

If you look around in the CRM space, E.piphany is still better than the other fallen stars like Kana, eGain, and so forth. Siebel is still the remaining pure-play CRM leader with $1.3 Billion 2004 sales, and a $4.7 Billion market cap, and the top acquisition target in the category.

It looks like E.piphany’s destiny will depend somewhat on who acquires Siebel: SAP or Oracle? If the Retek drama is any indication, I would say, Oracle will win the bidding battle against SAP. However, there is a potential wild card: IBM. Siebel’s current CEO is an IBM alumni. IBM has so far not entered the business application space. Acquiring Siebel would change that.

In any case, under all the above scenarios, E.piphany looks like a lonely, passive girl at the ball who doesn’t get asked to dance, but keeps hoping she would be. Meanwhile, she ages and withers.

Here are some ideas to dress her up and give her a make-over, so that suitors come flocking:

* Turn E.piphany into a technology-enabled services play, with an India-based BPO operation.
* Develop core competency in delivering business intelligence as a service, using the product suite as enabling technology.
* Build, Operate and Transfer (BOT) world-class off-shore business intelligence operations on behalf of Fortune 1000 / Global 2000 customers.
* Engineer a potential CRM roll-up in conjunction with private equity investors, using the story of such a business model change that warrants a much improved P&L structure.

Chip VCs: Enhanced “nerd” factor needed

Posted on Wednesday, Apr 6th 2005

I mentioned Chip Scale Packing (CSP), which I should also explain further. In simple terms, for these miniaturized consumer devices, Printed Circuit Board (PCB) real estate is a big problem. CSP is a packaging technology that allows chips to be packaged “at the scale of the chip” with marginally more area requirement.

In recent times, a company that has monetized CSP technology really well is Tessera (TSRA). Tessera’s µBGA® technology enables many of the miniaturized device vendors’ high volume products, creating a lucrative royalty stream for the company. The stock shows a 52-week range of 15.64 – 46.28 this morning, steadily increasing in the last year, following a late 2003 IPO.

For VCs looking for new investments, the IP licensing model that Tessera has used is a good one to consider. VCs should also look at the periphery of the core component business – towards packaging, interconnects, thermal and power optimization techniques for new investment opportunities.

SiP is a major discontinuity

Posted on Wednesday, Apr 6th 2005

Okay, so I should explain what is the big deal about System-in-Package (SiP) …

You must have noticed the trend in cellular handsets of packing in dramatically diverse functionality? Samsung’s latest model has a 5 Mega Pixel camera, and if this is any indication, consumers will further reap benefits of such integration trends in the coming years.

What makes this possible? For a miniscule gadget to pack in various kinds of RF modules, DSP blocks, memory modules, etc. – the technology being used is SiP. It is at the heart of electronics miniaturization, along with Chip Scale Packaging (CSP). The differentiating phenomenon in very fast turn-around, affordable hyper-integration is SiP.

And what’s even more attractive for the IDMs is the fact that the SiP design paradigm allows them to mix dies from different process nodes. They can mix three 130nm modules with one 65nm module, thereby amortizing the old processes.

Finally, SiP will put a further brake in the slowdown of Moore’s Law. Now that old processes can be mixed in with the new, IDMs should rethink their entire product strategies, and Foundries should do capacity planning assuming that not all parts of a chip will require the newest process.

By all measures, SiP is a major discontinuity in the semiconductor business. Those chip houses who will figure out the implications and take advantage of it, stand to win big.