Consolidation for Sale: the Tech Industry by 2020

Monday Jan 7th 2008 by Steve Andriole
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The future of IT is visible in the flurry of mergers and acquisitions now taking place. Here’s an outline of where it’s headed.

How far will industry consolidation go?

Will there be one ERP vendor?

Two PC manufacturers?

Three data base vendors?

Will there be any independent BI vendors?

What happens when the dust settles? What will the industry look like when the M&A music stops? Let me make some predictions.

First, vendors will continue to gobble each other up. HP, IBM, Oracle, Intel, Microsoft, Hitachi and Cisco will get bigger. EDS, Dell, Accenture, PWC, Deloite, CSC, Sun, Lucent and EMC will be acquired and folded into solutions providers as the gap between software and services blurs. SAP is a wild card, though I would not be surprised if they ended up with IBM or even Accenture on their way to IBM – or even Microsoft. HP will gobble up the smaller players in the hardware space. Dell has to fix itself and if it does could become an acquirer versus, ultimately, an acquiree. Apple will go its own way as long as Steve Jobs is running the company, though he might well acquire some key partners or even move on some unconventional partners like gamers.

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“Total solution providers” (TSPs) will emerge as the vendors of choice. As more and more buyers outsource, they will be looking to offload management responsibility to a single point of conflict. IBM is already there; HP is almost there. Oracle and Microsoft need to add software and broader consulting services to their repertoires. Cisco will cross the hardware/software chasm, offering a variety of software and consulting services, especially in the infrastructure area. Intel will remain an arms dealer, supplying weapons to whoever wants them.

TSPs will rent as much software as they sell-for-installation until 2012 when they will rent more than they sell-for-installation. Software-as-a-Service (SaaS) will become the dominant software delivery model in five years. TSPs will blend proprietary and open source software for delivery to their clients – who really won’t care who ultimately owns the software (or where it’s located) as long as it’s secure and reliable.

TSPs will become the repositories for APIs and widgets, guaranteeing their interoperability and security. Mashups will replace rapid application development (RAD). What lives inside the firewall will continue to shrink over time: by 2020 there won’t be much left. Instead, data, transactions and processes will live in named corporate clouds where companies will access their own virtual servers, data bases and desktops in cyberspace. By that time, there will be less than 10 global technology vendors controlling 75% of the business.

Innovation will not, by and large, come from the mighty ten. Of course, they will invest heavily in R&D, but disruptive innovation will continue to come from entrepreneurs funded by a still robust venture capital community (in spite of what Warren Buffet says about the structure of private equity funds). The mighty ten will acquire this new technology and, in effect, outsource much of their R&D. Over time, their R&D budgets will actually shrink; the really smart ones will divert a lot of R&D funding to early-stage company investment opportunities.

A whole new world? Absolutely. We’re now seeing the beginning of that world as the pace of mergers and acquisitions accelerates.

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How should you adapt to this new world? Well, as accurate as I like to think I am about M&A (for example, BEA will eventually go when the price gets better), don’t bet on any specific acquisitions or mergers in an effort to game the system. It’s impossible to predict exactly what will happen – or when. At the same time, it’s clear that there will be more acquisitions and mergers and that consolidation will accelerate over the next few years to the point where a final outline of the industry will appear by 2012. So the recommendation is to begin to define the kind of relationship you might want with a TSP – and how you might pilot that relationship with an-almost-total-system-provider before the M&A music stops.

I’d also invest in vendor management best practice development and implementation. While vendor management offices are appearing more frequently now than they had in the 1990s, companies should invest in the tools, technologies, methods and processes likely to optimize the relationships they have with their vendors. Vendor management will quickly become a core competency for 21st century companies.

Finally, if you’re a betting man or woman you could make a list of stocks to buy, sell or short given what you’re willing to bet about the direction industry consolidation will take, noting that acquirers usually lose value when they buy expensive companies and acquirees usually command a stock premium.

Good luck.

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