Is the tech sector ready for consolidation?

When Gartner's chief executive officer and chairman Michael Fleisher declared this week that the IT industry is ready for...

When Gartner's chief executive officer and chairman Michael Fleisher declared this week that the IT industry is ready for consolidation, several analysts did not blink an eye.

Frank Dzubeck, an analyst at Communications Network Architects agreed that there will be consolidation in the technology industry, although he said he doesn't think it will involve the top-tier players.

"There would be antitrust issues if an IBM bought a Sun," he said. "Mergers or acquisitions in that space would be suspect."

At the research firm's Symposium ITxpo 2001, Fleisher said IT managers must be prepared to see half of all well-known IT vendors disappear in the next three years, either through mergers or bankruptcy.

The slowdown in IT spending caused by the downturn in the economy, the threat of terrorist attacks and war pose significant challenges for IT managers, who will be asked to do more with less, while still keeping investors happy, Fleisher said.

Fleisher said the proposed merger between Hewlett-Packard and Compaq signals the beginning of this new wave of consolidation.

However, Dzubeck said he thinks there will be mergers or acquisitions among smaller companies, such as supply-chain software vendors, security vendors and companies that develop handheld devices. The most difficult part of any merger or acquisition, he said, is how to get the two companies involved to agree on a price that will benefit the shareholders.

David Hilal, an analyst at Friedman, Billings & Ramsey, also agreed with Fleisher that consolidation in the tech industry is a given.

"I think it will happen within the next 12 or 18 months," he said. "You'll see larger companies buying up niche companies, and once it starts, there will be a domino effect."

Rob Enderle, an analyst at Giga, said he agrees that there currently is more capacity than demand for IT, but he said the problem with consolidation is who will consolidate with whom.

He said that rather than looking to mergers or acquisitions, some companies will look for other firms to fail and then buy up their assets.

Enderle said the market doesn't respond well to mergers and pointed to the HP/Compaq merger as an example. Within two weeks after the announcement, the value of the companies' stock had dropped, bringing down the value of the deal from $25bn (£17.2bn) to $17bn (£11.2bn).

"The HP/Compaq merger did more market damage," he said. "In today's market, mergers are risky."

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