Have big IT companies had their day?
Perceived and historic wisdom was that the large IT Companies gobbled up smaller IT Companies, once they had reached a size or prominence, writes Bob McDowall of Bloor Research.
Acquisition was dictated by the potential opportunity that technology had to integrate into the acquirer's business or to quietly turn off the technology of a prospective rival and competitor.
This was, of course, in the halcyon days when money, share prices and enthusiasm knew no bounds. The technology sector is recovering. How much is attributable to demand and how much is better management and "events" a matter of debate.
The industry has addressed the historic excesses of its fixed cost base. The big US companies for example are benefiting from the weakening dollar and rock bottom interest rates arising from the frenetic actions of the US Fiscal and Monetary Authorities to "steer the ship away" from the prospects of deflation which loom ahead in the USA.
Return on equity for IT Companies is forecast to rise again to over 8% from a low in 2002 of just over 2% but returns on equity of 15%/16% delivered in the late 1990's are not anticipated to recur.
The companies, which are now mature, are built around technologies they built, matured and "guarded " as core to their business. They are sizeable and mature. They rely on a mature customer market. There will be new and interesting technology investments, wireless and nano-technology come immediately to mind. Although it as unlikely they can continue to be amongst the star growth companies, large IT Companies may clearly invest in them. Such companies are likely to be new small, unknown companies.
When and where to invest for research and development of new products and services becomes the bigger challenge. To be effective, investment has to be spread. The luxury of being able to concentrate on a handful of large but predictable ventures is a high-risk strategy even if it still exists. The portfolio of such investment has to be reviewed periodically and frequently and the emphasis adjusted to meet perpetually changing events, discoveries and state of progress.
The large technology companies are increasingly investing in small technology through businesses development partnerships. In this way they do not miss out on developments, which could generate material future revenues and which they can accelerate to market with their superior financial resources. This enables them to put at risk relatively small sums in a wider range of projects than having to predict a few large investments.