Consolidation Forecast for Software Vendors

The continued slowdown in enterprise software spending appears to be having an additional effect on the software industry beyond declining revenues and profits.

The Dataquest unit of Gartner Inc., of Stamford, Conn., says in a new software report that the industry is entering a period of massive consolidation in which 50% of the top 50 software vendors will be merged into other companies or acquired outright between now and 2003. Dataquest blames some of the pressure to consolidate on conservative spending on enterprise software.

The trend of software firms consolidating is nothing new. Dataquest says that in the past three years, more than a quarter of leading software companies “have become the subject of merger, acquisition and divestiture (MAD)” activities. Only now, however, the pace will quicken, driven by deteriorating economic conditions and cautious spending on software by businesses.

“In many cases, strong brand names will survive under a new owner where the equity justifies it,” Joanne Correia, vice president for Gartner Dataquest’s Software Industry Research group, said.

And in a statement that bears watching by CIOs and IT execs, she also said that the outright demise of software vendors will become more commonplace “as the assets left by some failing companies don’t attract a new owner, however cheap they are to acquire.” In advice to vendors, she said they should be “actively seeking” MAD opportunities while they “still have substantial residual or purchasing value.”

Buyers, she said, will continue to spend cautiously, focusing on the bottom line for the foreseeable future. Growth in the worldwide software license market will be flat this year before growing 4% in 2002 and 8% in 2003.

Other Dataquest findings regarding enterprise software spending include:

  • The worldwide application software license market is projected to decline 6% this year and 1% in 2002 before growing 8% in 2003.
  • The worldwide infrastructure software license industry is expected to drop 3 % before recovering with 6% growth in 2002, and 8% in 2003.
  • Spending on security software will continue to grow, despite declines in 2001 and 2002 in most other segments of the software industry, albeit at a slower pace than in 2000, when it grew 25%. In 2001, security software is projected to be up 12%, with growth of 18% and 16% in the next two years, respectively. According to Colleen Graham, analyst for Dataquest’s Software Industry Research group, said post-Sept. 11, “companies that are tightening their budgets and re-prioritizing technology products will move security initiatives from the IT wish list to the list of IT must-haves.”