The urge to merge in 2008

Analysts point to more corporate tie-ups in the services and software spaces this year, with midsize players expected to join forces and buy out smaller firms.

If the first two months of the year are anything to go by, 2008 looks set to be an eventful year for mergers and acquisitions (M&A).

In January alone, two high-profile acquisitions were announced--Oracle picked up BEA Systems for US$8.5 billion and Sun Microsystems won over MySQL in a deal worth US$1 billion.

Microsoft last month offered US$44.6 billion to merge Yahoo into its fold, more than half a year after its interest in the Internet search giant surfaced. Although Yahoo's board and management have rejected the offer, all eyes will no doubt be on the developments in the months ahead especially since Yahoo is said to also be in talks with media company NewsCorp.

Analysts tell ZDNet Asia M&A activity in 2008 look set to continue in the software and services industries.

In the software space, consolidation took place in the business intelligence realm last year with acquisitions by Oracle, SAP and IBM, said Ravi Shekhar Pandey, manager for syndicated research at Springboard Research. This year, he expects action in the collaboration and virtualization space.

"Prime candidates for acquisition in these segments will be vendors like Citrix, SWsoft [now Parallels] and Virtual Iron," predicted Pandey in an e-mail.

India-based Pandey added acquisitions are also likely "in the middleware, IT infrastructure management and governance tools market", where large software vendors will pick up niche vendors with competencies such as SOA testing tools and SOA governance.

Peter Sondergaard, senior vice president of global research at Gartner, said software companies would in the next wave focus on establishing vertical industry competencies, for there is "no such thing as generic business processes" tied to a particular vertical.

Companies that specialize in collaboration and social networking software are also likely targets of acquisitions, added Sondergaard.

Over in the services domain, one big question remains: whether or not an Indian IT services company will score a major acquisition.

Could rumors of Infosys, and more recently, Wipro, making a bid for CapGemini point to concrete deals in the making?

Phil Codling, principal analyst at Ovum, said in a commentary in January that from interactions with IT services industry bosses, he gathered there was "no great desire to do large-scale M&A".

"We simply don't think the Indian firms, even the very largest ones such as Wipro and Infosys, have the capability or the desire to integrate an 80,000-employee global business into their high-margin, fast-growing operations," Codling noted.

Contrary to the belief of many that rapid consolidation is taking place in the IT services industry, "the fact is customers often find today that they have an even wider choice of IT services suppliers than they did five or 10 years ago", Codling said, adding that consolidation has so far been limited to the smaller and midsize segments.

"Midsize players have joined forces and the big fish have tended to swallow up much smaller, niche firms rather than taking on major acquisitions and integration headaches," said Codling. "This is likely to remain the pattern in 2008."

Springboard's Pandey agreed that Indian IT services providers had last year been more conservative than thought, and this cautious mentality will continue through 2008. But he's putting his money on at least one significant acquisition by an Indian IT services company, which will likely be Tata Consultancy Services (TCS).

TCS, being the "most global" among Indian IT service providers, has a worldwide delivery system and is still one of the low-cost players, but it is still not in the league of the likes of IBM or Accenture, noted Pandey.

"[TCS] will try and buy some top-tier American company to gain a bigger scale and depth in its offerings or it will eye some top-tier European company--especially companies with niche market penetration based in the United Kingdom, France, Germany and Spain--to tap into the European market and neutralize risks from a weakening dollar and a possible slowdown in the U.S. economy," said Pandey.

Gartner's Sondergaard pointed out that telecoms players could also be buyers of services companies, as they ramp up or expand their network services portfolio. In Asia, China Mobile could be one such example, he said.