Tech M&A Raises Fears Over Software Pricing, Bundling for CIOs

lly Financial’s Sathish Muthukrishnan says he expects to see more M&A this year because startups are under more pressure to show revenue rather than just growth
lly Financial’s Sathish Muthukrishnan says he expects to see more M&A this year because startups are under more pressure to show revenue rather than just growth

Summary

Chief information officers say they are concerned about vendors shifting sales strategies in favor of bigger, pricier software bundles thanks to an uptick in business technology acquisitions.

Chief information officers say they are concerned about vendors shifting sales strategies in favor of bigger, pricier software bundles thanks to an uptick in business technology acquisitions.

VMware became one of the latest companies to do so following its recent acquisition by Broadcom. The provider of foundational “virtualization" software went from more than 160 individual products to two primary bundled offerings. Broadcom’s VMware Cloud Foundation division said the new bundles will provide better value since they have more features.

But in some cases like this, CIOs said they now have to pay higher prices despite not actually wanting all those features.

“I don’t need all those things because I now end up with products that are overlapping Venn diagrams and very hard to manage," said Todd Florence, CIO of Richmond, Va.-based trucker Estes Express Lines.

Chad Simpson, CIO of Florida-based home furnishings retailer CITY Furniture said he’s seeing a similar phenomenon with Salesforce. “They purchase many smaller companies to extend their core capabilities, which ultimately drives up their pricing model over time," he said.

Salesforce said it recently unveiled the Unlimited Edition+ bundle, which provides access across Slack, Tableau, Sales Cloud, Service Cloud, Einstein AI, Data Cloud, and Industries all in a single offering. Bill Patterson, EVP of corporate strategy, in a statement described the bundling strategy as offering customers better value and helping them move faster, reduce complexity and better compete.

Any deal can trigger among customers a cascading array of questions and concerns. Consolidation could mean that CIOs have one less vendor to deal with, reducing complexity. At the same time, there is the possibility that a deal results in higher prices or even the eventual retirement of a favorite tool. Such was the case with Adobe’s acquisition of Macromedia, which ultimately led to the discontinuation of Flash and other tools.

IT vendors frequently make an acquisition to boost their portfolio, combining new tools and feature sets to sell at higher prices and drive greater returns for their business, said Barry Brunsman, principal in KPMG’s CIO advisory organization. “Technology vendors are the same as every other sort of business. They are interested in finding ways to expand their share of wallet or their mind share with their customers," he said.

More acquisitions could be on the horizon. Despite a disappointing year in 2023 for M&A—in which deal volume and the total market value of those transactions fell well below 2021 highs—a handful of billion-dollar-plus enterprise tech deals led by Cisco, IBM and Hewlett Packard Enterprise signal the tide is shifting for M&A.

But to the extent that M&A events can also trigger bigger, potentially more bloated bundles, CIOs are concerned.

It’s a perennial problem in software that vendors are trying to sell you on the Ferrari when all you really need is the Toyota, said CITY Furniture’s Simpson. M&A exacerbates that trend, he said. When new features are added, the unit price gets higher, regardless of how much a customer will use those new features.

He said he wishes software vendors would offer more flexible, modular, menu-style offerings, similar to the way cloud is sold and priced. “They want to sell you essentially the full menu and you want to hope that you’re going to use the full menu of offerings, but the reality is that most companies can’t and won’t."

“I constantly think about this," said Sathish Muthukrishnan, chief information, data and digital officer at Ally Financial. Typically when an acquisition occurs, the customer loses pricing leverage and at the same time the vendor shifts from focusing on growth to focusing on capital efficiency, he said. That shift can come at the risk of under-serving clients, he said.

Muthukrishnan said he expects to see more M&A this year because, with the cost of capital higher than in recent years, startups are under more pressure to show revenue rather than just growth. Often they’re looking to be acquired to make that happen, he said.

There are some areas where CIOs are eager for vendors to consolidate. Cybersecurity is one of them. According to Dominic Lajoie, CIO of AI search and personalization company Coveo, tapping fewer vendors, each of which offer more capabilities, has allowed the company to reduce its attack surface, negotiate better discounts and develop deeper expertise in the systems it does use. It’s also allowed the company to avoid sometimes high integration costs of stitching so many disparate systems together, he said.

Integration can also help companies reduce duplicative services. For example, Lajoie said Coveo has been using both Slack and Salesforce’s communications tool, Chatter, which offer similar chat services. Now that Salesforce is integrating Slack, and using it to fully replace Chatter, Coveo will be able to reduce complexity.

That said, Lajoie added, any M&A event triggers a lot of question marks for a CIO, and it is never clear how well products will actually end up being integrated with each other and how stable prices will remain.

Lajoie said, “We’re asking ourselves: the landscape is changing, the offering is changing. Is it still the right thing for us? Yes or no? And depending on our conclusion, we either work with that vendor or maybe part ways."

Write to Isabelle Bousquette at isabelle.bousquette@wsj.com

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