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Friday, July 09, 2004Consolidation fever hits software product makers via BweekAs earnings fall and competition stiffens, many will have no choice but to merge or die. The hunt is already on vast fortunes were built over the last two decades as the leadership of the computing world shifted from hardware to software. Yet, every day seems to bring fresh evidence that the era of boundless growth for software may be over.That growing financial pressure will likely spark a powerful wave of consolidation throughout the industry over the next few years. Investment bankers say half of the sector's 600 publicly traded companies are likely to be eliminated. "I do think there's going to be a lot of consolidation in the software sector. As IT [info-tech] spending slows, it's harder for companies to grow organically. Big companies will add customers by acquiring smaller companies," says Paul Crisci, an investment banker at Jefferies & Co.'s Broadview unit, which specializes in tech deals.Some analysts doubt that the consolidation will be quite that dramatic. Many smaller, unprofitable companies have cut costs and have lots of cash on their balance sheets. That means they can hang around "like vampires," slashing prices and depressing margins industrywide. "There might be a need for consolidation, but that doesn't automatically mean it will happen," says analyst Bill Whyman of investment researcher The Precursor Group.About one-third of the industry's profits are concentrated in the hands of the 20 biggest players, according to Simon Heap, a software merger specialist at consultant Bain & Co. That was O.K. during the bull market of the 1990s, when the benchmark of success was fast revenue growth and a hot IPO. But earnings have replaced revenue growth as the new measure of success on Wall Street.About one-third of the industry's profits are concentrated in the hands of the 20 biggest players, according to Simon Heap, a software merger specialist at consultant Bain & Co. That was O.K. during the bull market of the 1990s, when the benchmark of success was fast revenue growth and a hot IPO. But earnings have replaced revenue growth as the new measure of success on Wall Street.Acquirers have one thing working in their favor this time around, however: The price of target companies has fallen since the '90s boom, reducing the risk of overpaying. And given the passage of time, it's easier to evaluate the strength of a company that's being acquired.Consolidation won't be a panacea for software's woes, but it's bound to help the industry adjust to the realities of a maturing market.| |
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