IT set to remain a buyer’s market this year and next

Manufacturing businesses looking to restart IT projects should be finding keen prices for just about anything they want. The UK software and IT services industry has taken a beating as users have substantially cut back on IT spending post Y2k and ‘e’, and with IT budgets remaining tight and business generally more savvy, is set to continue to do so. Even with tentative recovery, supply side over-capacity and over-manning, coupled with users very focused on making more from the infrastructure they’ve got and demanding tight ROI proof, it is a buyer’s market. This is the key message from analyst Ovum Holway’s latest report, Industry Trends 2002, which also advises IT vendors that austerity measures should remain the order of the day. The report indicates that the IT downturn has bottomed out, but with business and margins only set to grow slowly from next year, suppliers need to adjust business plans accordingly and continue cost cutting. “Suppliers are really suffering,” observes research manager Anthony Miller. “They have been paying the price for their over-indulgence ever since the Y2k/dotcom/telecom bubble burst.” And the clear danger of that is getting good deals now but at the expense of support later, as companies are forced out of business or into accepting hostile bids. Most revealing, the survey shows that for the first time, the UK IT industry made a net loss in 2001 – and did so in spades. Miller says UK suppliers lost a total estimated £2.5 billion pre tax last year, and are unlikely to return to profit until 2003. Much of that was exceptional costs, including notably goodwill write-offs as a result of ill timed mergers and acquisitions, but even excluding this, the industry was still in debt. Indeed, at the end of June this year, goodwill carried by UK software vendors amounted to more than 50% of total market capitalisation. It is a sorry picture. And the research also indicates that margins will be static at –3.4% this year, recovering in 2003, but then only slowly. In the boom days pre 2000 margins showed an average 7% falling to 0.3% in 2000 and to –3.4% last year. The forecast for next year is 2.5% average, rising to 5.5% by2005 with company right-sizing complete. Some UK IT vendors are still making money. Ovum Holway finds the most profitable in 2001 were Logica (£136 million) and Sage (£121 million). But most are not. And with user industry erring already on the side of caution, it could be that the big get bigger, while smaller players, perceived as increasingly risky partners, suffer further. “Many suppliers … got caught with far too high a cost base for the amount of business they were actually able to generate,” explains Miller. Time for a good dose of due diligence. Interestingly, note that it hasn’t just been top line financial performance that has suffered. Merger and acquisition activity also slowed last year, with company valuations undergoing huge ‘corrections’, back to values in the pre-boom years of the ‘90s. Following a period of potential buyers with inadequate cash and reducing share values, and sellers seeing plunging offer prices, we’re now seeing more ‘distress’ sales and management buy-outs, as companies find divestiture either more attractive or even essential. In fact Ovum Holway finds corporate investment in the software and services industry fell 37% in 2001, and with scandals in the US high tech sector is likely to have fallen further this year. Ovum Holway conculdes that for software vendors, “It’s a matter of being realistic: you just have to understand that the days of champagne and caviar are well and truly over.”