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Consolidation - the not so dirty word?

Consolidation - the not so dirty word?

Consolidation means many things to different people. But it appears for most to conjure thoughts of uncertainty, change and redundancies. Have we become too cynical about the role that this fundamental market phenomenon has to play?

In my last column, I talked about services companies emerging from the recession, noting in particular that no-one is out of the woods yet. So, one could be forgiven for assuming that following on with the topic of consolidation, I would be forecasting yet more doom and gloom. But there is a big difference between the ‘fire sale’ approach to acquisition and mergers and acquisitions as a strategic activity.

There have been, and will always be, acquisitions at the top end of town and these transactions will have a large and overt impact on the market. In 2005, consolidation saw Telecom subsidiary Gen-i become the number-one services provider in New Zealand – a first for a telco anywhere in the world, but in 2009 further consolidation saw HP (and EDS) take back that crown.

But where it gets really interesting is in the tier two services space. In this space it is mostly privately held companies such as Integral/Axon, Solnet, Maclean Computing, Eagle Technology, Certus, Tenzing, Soltius, Intergen, Optimation ... and the list goes on.

Many of these companies are mature or maturing, and for me, that signals a market ripe for change. And positive change at that.

But what does this change represent in the strategic direction of these companies? There is the classic story; how do companies grow from a $10 million dollar to a $20 million dollar company – or $20 million dollar to a $40 million dollar company?

As markets and industries mature, there is less need for the huge assortment of providers you see in a young, booming market where growth is there for the taking. But once it matures and becomes saturated there is only room for the bare minimum of providers – think oil industry, or supermarkets. In a saturated market, competitors merging can create a win-win scenario for both buyers and sellers.

Increasing maturity and the changing dynamic creates huge opportunities in the tier two services space, providing exit strategies for business owners that have dedicated the past five, 10 or 20 years of their lives to building their business. More and more local companies are finding themselves in this position – resulting in acquisitions such as Integral’s of Axon. All of it moves the market forward and changes the shape of the industry.

But what about the more adventurous companies that are looking to diversify and revamp customer value propositions? I can see huge opportunities for diversification and the merging of companies that may not compete. For example, consider a market where service providers were aligned with customers and not with hardware and software vendors. A market where customer needs dictate vertically-focused solutions, which are delivered across a range of technologies.

How different the dynamics would be in a market where service providers are technically and functionally aligned to sectors - retail, manufacturing or even government. One could argue that this minimises the opportunities for growth in market share – but in a mature market this is nothing new. And despite reducing the potential addressable market, it does create a compelling argument for growing share of wallet of customers within that space.

For many people, whatever the industry, consolidation is a dirty word. It has a negative spin. But consolidation has been the driving force behind some huge changes in our industry and will continue to do so.

In a market still reeling from the recession, it is easy to believe that consolidation will be negative and dominated by fire sales. But the fact remains that consolidation will inevitably drive the industry forward, reshape it and for tier two players in particular, there is potential to generate huge growth, orchestrate a changing of the guard, or to create some game-changing results.

Jenna Woolley is a former services analyst and researcher for IDC in New Zealand and Asia Pacific. She specialises in ICT market strategy and can be contacted at blacksheepconsulting@xtra.co.nz


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