Software mergers likely to continue in 2005

In a trend that seems to have reversed itself in recent years, mergers and acquisitions in the Canadian software and computer services industry have made a comeback in 2004.This is according to a recent report released by Canadian Advanced Technology Alliance (CATA).

In 2004, the report says, the number of mergers increased by 40 per cent with the value of all deals also rising 115 per cent, from $1.3 billion to $2.8 billion. As well, the report found Canadian software companies bought more foreign firms than vice-versa. The largest deal was CGI’s acquisition of American Management Systems for $756 million.

The recent rebound almost resembles the trend witnessed in 2000, when the value of Canadian acquisitions of foreign companies totaled $3.4 billion. However, it would be a while before we see similar numbers, according to Dave Paterson, national director, Public Affairs for CATA . “We are going to have to have an awfully strong market for a long time before we see $3 billion again.”

Paterson, who has authored this report since 1996, also found a number of companies are acquiring technology they did not previously have, as well as ones that are expanding for geographic reasons. “It is much faster to establish yourself in another geographical market by buying somebody who is already there and has an established clientele than it is to go in and start cold calling.”

He added that consolidation is clearly a trend in the global software industry. “The slower pace of revenue growth in the software industry has prompted companies to pursue growth through acquisitions strategies,” Paterson said. He cited the recent deals between Symantec and Veritas and Oracle and PeoplSoft as examples, and expects this trend to continue in 2005.

Michelle Warren, IT industry analyst for Toronto-based Evans Research Corp. said it is inevitable that this trend would roll over into this year and beyond because of the maturing of the IT market.

“This is the new playing field. We are going to see companies merging to help streamline operations. It is all about the customer right now versus 10 years ago, [when] it was more about the technology,” she said. She also added that the report shows a good cross-section of the IT market that is consolidating, including telecommunications and customer relationship management.

The increase in mergers can only be a good thing for customers, Paterson and Warren agree. “[Customers] would have a strong relationship with one organization and be able to capitalize on the merger [of] the second company….You get the best of both worlds,” Warren said. However, she added that it is a huge job to integrate two organizations. A clear vision regarding the need for the merger must be determined before it happens, as well as what the merging firms hope to gain and what the benefits are for the customers and for the organizations.

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