Crossroads

At the intersection of technology, finance and the Pacific Rim.

Tuesday, October 20, 2009

The State of the IT Industry

One area that we do not talk about as much in class is the huge market for IT in the business world. It is certainly as large as the consumer side, where we have been spending most of our time. There are three distinct patterns in the IT Industry, according to FT, as quoted below:

First, increased M&A activity:

the recent pick-up in mergers and acquisitions in the sector suggests, neither buyers nor sellers of companies any longer feel the paralysing uncertainty that freezes dealmaking in a downturn.

In its pursuit of new markets to conquer, for instance, networking equipment-maker Cisco has pulled off two $3bn acquisitions this month, taking it further into the video-conferencing and mobile-networking markets.

"Tech companies have clean balance sheets and they're chasing growth," says Christopher Varelas, a former top technology investment banker and founder of Riverwood Capital, a Silicon Valley private equity firm. "The only way to stay out in front of these trends is global consolidation."

Second, an accent on services:

Services represent a more constant source of income, thanks partly to the longer-term nature of services contracts. They also typically come out of a company's operating budget, not the capital budget set aside for large technology purchases, making them less vulnerable to swings in capital spending.

That has helped to trigger a long-predicted realignment of IT, with hardware-makers diversifying into services. Xerox last month agreed to pay $6bn for ACS, a services company, while Dell agreed to buy Perot Systems for $3.9bn. Those deals come in the wake of Hewlett-Packard's $13.9bn purchase last year of EDS. The diversification into services and increasing vertical integration in IT are trends that are set to continue, says Mr Gopalakrishnan.

Third, Emerging Markets:

The hunt for growth, meanwhile, has led to a focus on customers based in the emerging world. Thanks to continued high rates of economic growth and the need for infrastructure - from new telecommunications networks to banking systems and "smart" power grids capable of distributing electricity more efficiently - these countries are set to assume a much larger significance in the market.

Though they currently represent only 21 per cent of global spending on IT, more than half of all new technology spending over the next four years will come from the emerging world, according to IDC, a technology research company.

That suggests that in the technology cycle that is just beginning, emerging countries will for the first time exert a powerful influence as leading sources of new demand as well as main sources of supply. world. Thanks to continued high rates of economic growth and the need for infrastructure - from new telecommunications networks to banking systems and "smart" power grids capable of distributing electricity more efficiently - these countries are set to assume a much larger significance in the market.

For the full article, go here.

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