Drive for functionality, market share fuels Q2 consolidation spike
By Staff -- Manufacturing Business Technology, 9/1/2005 12:00:00 AM
Consolidation in the technology sector spiked during second-quarter 2005, with 695 deals totaling $86 billion, according to New York-based The 451 Group, which monitors such transactions. This represents a 15-percent increase over the previous quarter, well above previous-year activity for the same period. Also, it is the largest quarterly volume since the research group began tracking mergers and acquisitions (M&A) in 2002.
"Most of the activity is to fill gaps in technology, or make a play for customers otherwise unavailable because they already have technology in place," says Tony Rizzo, director of M&A research for The 451 Group. "The only way to grow market share in a saturated, mature market is to buy it."
Overall, 17 deals topped $1 billion—up from 11 the first quarter. Enterprise software continued to account for the majority of the transactions, with 205 deals worth $13.3 billion. This was divided between 124 transactions involving software applications, totaling $4.3 billion; and 81 acquisitions of software infrastructure technology, totaling $9 billion. In particular, Sun Microsystems significantly boosted its own M&A activity, spending $4.6 billion to buy four companies.
Jim Shepherd, senior VP of Boston-based AMR Research, believes market maturity is the key driver behind the ongoing consolidation.
"The software industry grew in a predictable way, with hundreds of companies formed, and now we're going through the natural cycle of consolidation—and have been for some time," says Shepherd. "The weaker ones get acquired, and the strong ones get bigger. You're also seeing a strong bias in the marketplace on the part of users wanting to buy only from large global software vendors."
According to Shepherd, acquisitions often are considered a faster route than internal development for adding critical functionality. "Oracle used to be famous for never buying anything," he says. "Larry Ellison once said, 'We write software, not checks.' But he's been writing some big checks lately, and he is the first to admit Oracle's strategy has changed."
Shepherd sees Oracle continuing to acquire. "Clearly, Oracle is not done, and I suspect they will be more tactical as they build out their solution for vertical industries," he says. "You also [see activity within] companies like SSA Global and Infor. In the case of SSA, it will do more consolidation around supply chain management. For Infor, it will be to add vertical markets."
