Tech Industry Consolidation (from McKinsey Quarterly) writes about the coming M&A boom (of which we are already starting to see examples – eg. Juniper buying NetScreen):

Technology is a huge sector composed of many industries and markets. The pressures on companies are mounting fast, though the ghost of consolidation won’t haunt each of them equally. Indeed, some segments have already consolidated. Where once there were a fair number of operating systems for PCs, midrange computers and mainframes, for instance, now there are only a few. The database software industry has gone the same way. But other industries, by the very nature of the value propositions their niche companies provide, will probably remain fragmented. Vertical-specific applications are an example.

We found strong signs of impending restructuring in 11 of the industries we analyzed . These hot spots account for more than two-thirds of the sector’s revenue-a fact that speaks volumes about its ripeness for consolidation. In IT services, for example, professional and outsourcing services seem to be poised for an across-the-board restructuring. Software is vulnerable in particular areas, such as enterprise applications; storage; network and systems management and security; middleware; and software for application servers. In hardware the targets are PCs and notebook computers, networking gear and storage systems; in semiconductors they are logic, memory and semiconductor equipment.

While economic forces take effect, companies will jockey for increased scale, scope or some combination of both. As in any sector, scale-driven mergers, to streamline fixed costs over greater volumes and to satisfy the demand for bigger and more stable suppliers, will mostly take place between companies competing in the same industry.

Customers’ needs will also influence mergers undertaken for advantages of scope. Indeed, deals of this nature have already been done: in response to financial pressures and to the clamor of capital markets, companies that manufacture technology products have been acquiring service firms. We expect such mergers to proliferate as companies expand their breadth of product or service offerings to position themselves as preferred suppliers for big customers, to chase new profit streams, and to hunt for cross-selling and multichannel synergies.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.