Consolidation shows maturity

Technology sector mergers and acquisitions (M&As) have reached an all-time high – up 24 per cent in value terms in 2006 compared with the previous year, according to the latest figures. For businesses buying IT and related services, this supplier consolidation is both good and bad news.

The good news is that intensive M&A activity is a sign of economic health. Current trends in the technology sector parallel those in the wider economy, indicating a realism and stability particularly valuable after the dot com boom and bust.

High levels of M&A are also symptomatic of a sector maturing beyond the early stage typified by legions of small suppliers in every possible niche, few industry-wide standards and high levels of often risky investment.

Typically, industries go through a period of consolidation when the big players have enough money to throw around and enough confidence to expand outside areas of core competence.

Major suppliers with enormous reach, wealth and stability sound ideal – the downside for customers is that consolidation means less innovation, less competition and less choice.

But Behemoths are also vulnerable. Consolidation is itself only a phase in the cycle of coalescence and fragmentation that characterises a mature industry sector.

Global giants are subject to inertia and complacency, leaving them in danger from quarters that may seem no threat at all.

The fast-moving, quick-thinking startup has a dynamism and a hunger for success that is all but lost to a massive company in multiple markets, in numerous countries, and which has invested heavily in the status quo.

A distinct benefit of the global economy is that such competitive pressures are exponentially increased. From the business IT customer’s point of view, the explosive growth of developing economies such as India and China – far from being the threat they are commonly portrayed to be – will furnish a continuous stream of innovative gnats to keep the hippos on their toes.