For some time, the rules of economics
appeared not to apply to the high-technology sector. Growth slowed, profitsshrank, and investors eagerly awaited thebillions ofdollars in value likely to flowfrom mergers, acquisitions, downsizings,and liquidations. All signs pointed to animminent restructuring, yet until recentlylittle occurred.Today consolidation pressures are mountingfast, and some segments have alreadysuccumbed. Where operating systems forPCs, midrange computers, and mainframeswere once numerous, now only a fewremain. Ditto for database software. Nicheplayers in segments such as vertical-specificapplications may remain fragmented, thanksin part to the unique nature ofthe valuepropositions they offer.To develop a sense ofhow imminentconsolidation really is, and to pinpoint thesegments within and outside high tech thatmight encounter challenges or opportunitiesin the trend, we investigated the extent towhich the economic forces drivingconsolidation were at play in 21 ofthesector’s leading industries. The indicatorswe looked at included each industry’sfragmentation levels, maturity (as measuredby growth rates), and profitability. We alsoconsidered incentives for consolidation, suchas the need for scale to justify larger capitalexpenditures and the importance ofscopeto meet the customer’s changing needs.
Where and how
We found strong signs ofimpendingrestructuring in 11 ofthe industries weanalyzed (Exhibit 1). These hot spotsaccount for more than two-thirds ofthesector’s revenues—a fact that speaksvolumes about its ripeness for consolidation.In IT services, for example, professional andoutsourcing services seem to be poised foran across-the-board restructuring. Softwareis vulnerable in particular areas, such asenterprise applications, network and systemsmanagement and security, middleware, andsoftware for application servers. Inhardware, the targets are PCs and notebookcomputers, networking gear, and storagesystems; in semiconductors, they are logic,memory, and semiconductor equipment. Ourresearch also found many small and midsizecompanies that are barely profitable, ifatall, with cost structures more appropriate tolarger businesses (Exhibit 2).As economic forces take effect, companieswill jockey for increased scale or scope orfor some combination ofboth (Exhibit 3).As in any sector, scale-driven mergers,which aim to streamline fixed costs overgreater volumes and to satisfy the demandfor bigger and more stable suppliers, willmostly take place between companiescompeting in the same industry. Customerneeds will also influence mergers that areundertaken to achieve advantages ofscope.Indeed, deals ofthis nature have already
High tech’s comingconsolidation
Economic pressures to restructure high techwill eventually become irresistible. Moreacquisitions loom.
High tech’s coming consolidation
Bertil E. Chappuis,Kevin A. Frick, andPaul J. Roche