While the technology sector continues to struggle with sluggish information technology spending, there are bright spots within the broadly defined IT market. Most notably, business process outsourcing (BPO) and companies focused vertically either on the government sector or other niche markets. The BPO sector has re-emerged as companies have continued to focus on reducing cost, increasing efficiencies and focusing on its core competencies. As companies continue to address competitive issues within their specific marketplaces, outsource providers have proactively begun to bundle IT services and more far-reaching business process outsourcing services into one more complete solution.
Most notably are those with significant critical mass, increasing market share, sustainable revenues and margins, and the ability to meet customers’ current focus on varied solutions that enhance productivity in a short time period. In fact, traditional systems integrators have seen relatively minor volatility, exacerbating a valuation gap between companies that have adjusted to the changing market environment and those that have not been flexible. As a result, commercial IT companies have begun to use mergers and acquisitions as a tool for survival, particularly with limited access to the capital markets. Companies are aggressively seeking strategic acquisitions to sustain growth by broadening product/service offerings, removing competition, or expanding into new growth-oriented vertical and outsourcing markets.
The government IT market has also undergone significant transformation as a result of consolidation in the IT sector. In a short time period, numerous new participants, ranging from tradition commercial players to hardware-oriented defense contractors, have entered the government services area through acquisitions, dramatically changing the competitive environment and significantly increasing the critical mass threshold. Companies that continue to broaden their selection of customer solutions to offer “one-stop: shopping, will increasingly encumber growth opportunities for smaller government IT providers.
Despite the continued deal activity in the government services and BPO sectors, the worldwide IT market is still characterized by a fragmented range of large, diversified providers and small, niche-oriented players. Consolidation across industry/geographic verticals and products/services offerings had created only a handful of $1 billion + IT industry giants with a broad base of solutions. With the ongoing need to quickly adapt to changing market dynamics and the nearly $3 billion in new capital from the public markets, the IT industry is poised for continued consolidation.