Deconstructing the Software Business

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The disruption of the IT and software industry by the rapid rise of cloud and Software as a Service continues to take a toll on the biggest players in the business. In their latest round of desperate moves to reposition themselves in the radically changing marketplace, the major companies of the past have been willing to relinquish many of their software assets to refocus their efforts on new market opportunities.

Unfortunately, the divestiture of these software businesses is a classic, shortsighted "throwing the baby out with the bathwater" tactic that is likely to have a detrimental long-term impact on their competitive position as strategic sources in the enterprise market.

Hewlett Packard Enterprise is planning to spin off and merge its non-core software assets with Micro Focus in a deal estimated to be worth US$8.8 billion. The potential deal would include a variety of software components the old HP accumulated over the years through a series of acquisitions, most notably the ill-fated purchase of Autonomy Corporation in 2011 for $11 billion.

Although the arrangement with Micro Focus will enable HPE to retain a 50.1 percent equity stake in the joint business, it also frees the company to invest elsewhere, CEO Meg Whitman acknowledged. Its recent acquisition of Silicon Graphics Inc. is one example of its branching out.

HP spent approximately $20 billion on software company acquisitions and has watched its software revenues decline -- including nearly 12 percent over the first six months of 2016 compared to the same period a year ago, Sanford C. Bernstein analyst Toni Sacconaghi recently estimated.

Given HP's ongoing challenges selling its software solutions and establishing itself as a software leader, it makes sense that it would use its recent restructuring as an opportunity to rid itself of this unsuccessful business.

It made a similar move in the IT services sector in May, offloading its 100,000-employee service business, which included the old EDS outsourcing unit, to CSC Corp for $8.5 billion. That was another admission of HP's past M&A mistakes, as the sale price was well below the original EDS acquisition purchase value of $13.9 billion back in 2008.

HPE isn't alone among the major players in shedding its software assets. Dell has been selling off various components of its accumulated software portfolio to finance its acquisition of EMC. In June, it sold its software business unit to the private equity firm Francisco Partners Management and a new private equity arm of hedge fund Elliott Management Corp.

A variety of PE firms also are expected to be the likely buyers of HPE's software assets.

Both companies are rationalizing their software divestitures as a means of refocusing their operations on their core competencies of systems and servers. Although both claim they're retaining the specific software capabilities that relate to the emerging software-defined segment of the market, they are making these moves as "software is eating the world," as Marc Andreessen proclaimed five years ago.

Dell and HPE, in essence, are throwing in the towel regarding their past software ambitions in hopes that they can convince their customers to continue to rely on the more narrowly focused software that supports the vendors' systems and servers.

This is a treacherous strategy in a shrinking market that has seen almost every enterprise reduce its data center operations and shift its workloads to third-party cloud service providers, led by Amazon Web Services.

Dell and HPE also are giving up on the idea of following IBM's lead in offering a mix of hardware, software and services to satisfy the complex, multidimensional needs of their enterprise customers. Although IBM still faces its own struggles selling servers and systems, it has been successful selling software, and views its services as a critical component in its strategic success.

Dell and HPE aren't alone in trying to reinvent themselves in a rapidly changing software marketplace. The PE firms have been accumulating a number of publicly traded independent software vendors seeking to go private so they can restructure their applications and operations to better compete in the SaaS marketplace.

However, those ISVs aren't giving up on their software businesses. Instead, they're seeking a refuge where they can realign their software resources and go-to-market capabilities.

Dell and HPE may not be forfeiting their software businesses entirely. In fact, both companies will continue to reposition themselves in the software market with a new round of ISV acquisitions as their customers and M&A advisors convince them that the pendulum has swung back in a direction that dictates a renewed software focus.

In the meantime, it is understandable that Dell and HPE would like to shed their underperforming business units and start fresh in the software arena. However, both companies are going to face even greater challenges demonstrating their market relevance as they appear to be heading in the opposite direction of their corporate customers' immediate software needs.

Jeff Kaplan is the managing director of THINKstrategies, founder of the Cloud Computing Showplace, and host of the Cloud Innovators Summit executive forum series. He can be reached at [email protected]

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