Major IT consolidation expected

By Siyabonga Africa, ITWeb junior journalist

Johannesburg, 09 Feb 2009

The IT industry could see the consolidation of big companies as a means of growth, while the global market shrinks due to the financial crisis, say analysts and economists.

“It's a given global nature that in times like these what we will see is the formation of 'fusion economics' on a global scale, where companies meld together to survive harsh financial conditions,” says Econometrix economist Anthony Twine.

World Wide Worx director Arthur Goldstuck and Frost & Sullivan industry analyst Lindsey Mc Donald both back Twine's statement. They say major mergers should be expected in the industry as companies seek to buffer themselves from an inevitable recession.

“We must be conscious of the fact that companies in emerging markets are in a stronger position than their counterparts in developed countries. Most likely what we will see will be moves by companies in countries such as India and SA to strengthen their local positions, while looking for growth opportunities abroad,” says Mc Donald.

Telecoms big wigs

Mc Donald adds that large telecoms providers in SA are mostly likely to seek expansion opportunities in other African countries, as the financial crisis would allow for cheap investments that are guaranteed to deliver high returns.

Frost & Sullivan says the key telecoms players to look out for would be MTN and Telkom, which will make moves to expand their reach into the rest of the continent. Mc Donald says those companies would most likely invest in growing the markets abroad, at a cheap price, which would yield a high return after the recession.

“There may well be new opportunities for mergers and acquisitions, as weaker companies with potentially valuable products and intellectual property become susceptible to bargain hunters,” says Adrian Schofield, manager of the applied research unit at the Joburg Centre for Software Engineering.

Goldstuck adds that, during the year, the industry could expect to see the emergence of small, but attractive, companies in the service provider space.

Combine or die

Goldstuck warns that some big brands in the IT industry could end up extinct due to the recession. He says most companies will be looking for partnerships deals, yet this might not save them from closing down.

“The IT market in SA is very fragmented, especially in the small and medium enterprise segments,” says Mc Donald.

She explains that a number of vendors in SA, with their head offices based in countries where the recession has struck home, will be unable to make any moves to consolidate without the go-ahead from their parent companies, leaving them susceptible to adverse recessionary effects.

“Those that have been through several merger and acquisition rounds in the past may well find themselves on the roller-coaster again, and we can also expect other once-solid companies to also climb aboard this trend,” ends Goldstuck.