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Data centers deal with the fallout of mergers and acquisitions

The weak economy put many IT vendors, such as Sun Microsystems, on shaky ground, and IT pros have to worry about technology investments. Gartner and IT pros offer tips on managing vendor risk.

The weak economy has put many companies on shaky ground, giving IT pros more reason than ever to worry about the health and longevity of their technology providers.

For more on the impact of vendor M&A:
Virtual Iron VARs left in a lurch as Oracle shuts down product line

How data center pros do due diligence on startup software firms

Sun shops prefer Oracle to IBM, but worries persist

A VP of technical operations at a Seattle-based colocation facility offers a cautionary tale about the impact of vendor mergers and acquisitions on customers.

He is in the midst of a transition to a new metro Ethernet Fibre provider because in May 2006, his previous provider, OnFiber, was bought by Qwest. In his view, that acquisition led to subpar service and higher prices.

"We had a fantastic long-term business relationship with the previous provider; they were small, responsive, personable and, overall, just amazing to work with. Their prices were great. Their staff was motivated. Moves, adds and changes were painless. Their billing was accurate. Their support was the best," he said.

For example, in 2004, when the colo facility relocated, management signed a new lease before Thanksgiving, and OnFiber had connectivity up and running before New Year's Day thanks to the "amazing efforts" of its local operations staff, the VP said.

 With a merger or acquisition, one executive remains cautiously optimistic but always has a plan B ready to roll.

When Qwest entered the picture, everything went downhill, he said.

"Within a few months, several key people left. Response times for outages lengthened. Salespeople didn't return calls. Eighteen months after the acquisition, the megatelco announced that our rates would increase if we made any changes to the existing circuits," he said. "Needless to say, we were expecting this and had already begun migrating to an alternative provider."

Dealing with the fallout of mergers and acquisitions
When this executive suspects one of his major vendors is at risk, he tries to remain cautiously optimistic but also has a plan B ready to roll.

Gartner's list of M&A risks for users
Gartner Inc. suggests that IT pros watch for the following vendor risk areas and their warning signs.

  • Organizational risk. Changes in senior level staff in the organization can indicate vendor difficulties, as do large layoffs and senior execs selling off stock. Partnership ties being broken may also a bad sign
  • Financial risk. Monitor financial reports like stock -price-related metrics, vendor credit ratings, late filings, and bankruptcy
  • Support risk. Products or services are no longer supported or delivered to the standards outlined in the contract or set by vendors overall. This includes layoffs of staff that are critical to your business, lower service-level performance, product failures, spare shortages and lack of products support
  • Strategy risk. Abrupt changes to strategy might indicate issues such as lack of alignment, financial difficulties or an overall weak vision.

Such plans are not frivolous in a world where Oracle Corp. is near to closing its surprise acquisition of Sun Microsystems Inc. next month. That move leaves many Sun customers wondering about the fate of Sun hardware and software products.

News also hit this week that Oracle will kill Virtual Iron Software Inc., a small startup company it acquired a month ago, to integrate pieces of VI software into Oracle's virtualization technology Oracle VM. VI customers will have to either transition to Oracle VM or abandon their investments and switch virtualization providers.

The outcome of the Oracle-VI acquisition reinforces the idea that buying products from small startup technology companies is risky. But then again, investing in the largest tech companies, like Sun -- which technology analyst firm IDC ranks as the fourth largest server vendor following Dell -- isn't a safe bet either.

Other IT pros worry about snafus when their vendors for mission-critical business applications become unstable or get swallowed by another company. David Reynolds, a systems manager at the Rhode Island Blood Center, which uses Sun hardware and software, said it is a constant concern.

And with Sun transitioning to Oracle, Reynolds is often asked whether he plans to switch vendors or stick it out. "It's like anything else; you keep an eye on it. Sometimes the larger vendor has access to resources the smaller one did not. Other times, customer service is the first area to take the big hit," he said.

Rick Keefer, a senior solutions architect at the IT consulting firm Total Computer Solutions Inc., said vendor risk is difficult to determine, and in most cases, customers just have to deal with the results for the remainder of the product lifecycle.

"If you already have a product and the vendor gets acquired, you just have to live with that and continue your maintenance until it is time for replacement," he said. "There is no point in worrying about stuff you can't control. … But if you see a deal is under speculation by the SEC [Securities and Exchange Commission], you can decide whether to go cold turkey or wait it out and see what happens."

Keefer said the best-case scenario with acquisitions is when the acquiring company runs both businesses somewhat autonomously.

"As long as Oracle operates Sun separately, people who don't like Oracle should be able to live with that acquisition. For example, EMC Corp. never fully integrated with VMware, because it knew if it turned VMware over to the EMC sales force, users who love VMware but hate EMC wouldn't use it," Keefer said. "People who hate EMC continue to use VMware because it is a separate division. If EMC closed that gap, Microsoft would be opened up to a bigger chunk of the market."

Should you stay or should you go?
Opus Interactive's Chuck Swanson suggests that customers ask the following questions about IT provider mergers and acquisitions: 
  1. Does the acquiring provider plan to dissolve the acquired technology into its own? If so, you may want to see how that new technology solution will work before committing.
  2. How does the acquiring provider plan on offering customer service or support? What is its track record for support? Do some homework here before making any hasty decision.
  3. Will existing contracts and pricing commitments be honored?
  4. What kind of an investment has the company made in the acquired provider technology. If it's significant, then making a change could be cost prohibitive.

History can also serve as a strong predictor of what a company will do with the technologies it buys, Keefer said.

"Companies like Microsoft and CA are constantly acquiring small software companies -- and the joke in the industry is that CA is where software goes to die, so I would have to seriously consider what to do with a product that is bought by a company like that," he said.

Assessing vendor risk
According to research firm Gartner Inc., categorizing vendors and then rating their risk level is a good way to manage vendor risk. A vendor might be considered tactical if the company's investment in its products is small and easily replaceable. A strategic vendor, on the other hand, is one that the company invests a lot in and needs in order to do business.

When a technology provider is purchased by another vendor, a customer of the acquired company needs to ask some questions, such as, "Does the acquiring provider plan on supporting your existing technology and share a similar vision?" said Chuck Swanson, a spokesperson at Portland, Oregon-based colocation and hosting facility Opus Interactive. "If they do, it might be a good idea to ride the acquisition wave and see if there are any new features that might be brought into play. If not, consider changing providers," Swanson suggested.

Let us know what you think about the story; email Bridget Botelho, News Writer.

And check out our data center blogs: Server Farming, Mainframe Propellerhead and Data Center Facilities Pro.

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