Wednesday, April 30, 2008

Software industry Consolidating

This week ITvoir editorial team brings you an overview of the broad
trends that is observable in the worldwide software industry. In the
last some months suddenly mergers and acquisition in the software
industry are filling up newspaper.

Look at some of the recent examples. Microsoft trying to buy out Yahoo.
Google tying up with Yahoo for advertisement. Even newscorp a
traditional media company tying up with Microsoft.BBC bringing out
video features. Google buying orkut, you tube and the list is
unmistakingly very long. But the key word is simple. Software and IT
companies are going gung-ho over these mergers and acquisitions.

The software industry was all out for innovation and bringing new lines
of products in the beginning years of the internet boom observed during
initial years of this century. Then what has happened that focus has
shifted to mergers and acquisitions?

Every player in this field knows that Success in the software industry
for all times to come will be driven by discrete product innovations
and winners in software excel at building and extending platforms to
achieve scale in customer relationships. But at stake now is the future
control of installed bases. With growing competition only those
companies which have a clear category lead over others will survive or
otherwise those having the scale and scope will survive. According to
some surveys two of every three software companies didn't show profits
in 2006, making them more vulnerable as acquisition targets. With their
stock valuations rising, the larger players have amassed war chests.
Meanwhile, new license sales are no longer generating sizable growth-so
many software companies have concluded that they must pursue others'
installed bases and thus consolidate.

Further market worldwide is undergoing a fundamental shift. IT spending
growth has slowed and the industry's landscape is shifting away from a
helter skelter type of format to a more organized open standards or
those set by consortia of big vendors. Customers want reliability and
simplicity. Thus the final result is only few but strong players.

Thus at a time when product development is not giving benefits M&A
is the preferred choice to grow. Thus smaller r players have some of
these choices merge with another player, try to become a platform, or
fail. But some can expand into related services, as many are doing as
licensing revenue declines.

Indian scenario

Indian companies are not divorced from this global trend. According to
some surveys they are sitting over huge funds amounting to 1 to 2
billions and also the valuations of the Indian companies are high
compared to their US counterparts and thus this seem to be the right
time to enter into these large deals. At the beginning of 2008, Infosys
Technologies Ltd. forged a strategic alliance with Nihon Unisys Ltd. of
Japan in order to develop new software based products and market those
products. With the mergers and acquisitions, Wipro Ltd. would be in a
position to compete in the bid of the government projects. The company
is expecting a substantial increase the total revenue earned from the
Japanese market through the mergers and acquisitions. During January
and February of 2008, software companies stitched 18 M&A deals in
the cross-border category, where Indian IT/BPO companies acquired
overseas firms or vice versa, of which 14 were outbound transactions.
Similarly HCL Technologies Ltd acquired US-based Capital Stream Inc, in
an all-cash deal of about $40 million.

NIIT Technologies announced the acquisition of Germany-based SofTec
GmbH, a specialist in IT solutions and services in the airline revenue
accounting and operations space.Satyam Computer Services also announced
the acquisition of a Chicago-based management and consulting firm
Bridge Strategy Group, for $35 million, in an all-cash deal. Similarly
Mindtech (India) Ltd. acquired Infotech Consulting, a
Pennsylvania-based multi-disciplined technology services firm for $21

Thus the trend is unmistakingly towards consolidation and US recession
is sure to spur this process as smaller players are already stressed
over their margin profits and finally may decide to give in before
further erosion in their net worth takes place.

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