MARKET COMMENT
IT Is Dead, Long Live IT

By David Kuo (TMFDragon)
November 14, 2002

IT or Information Technology was, and still is, the cornerstone of productivity gains within our economies. Without the aid of IT, the downturn in global economies that we are experiencing now would perhaps be a whole lot worse. The deployment of the right type of IT packages has allowed many businesses to reduce overheads and, in turn, boost earnings. The range of software spans the free stuff that comes with computer operating systems to the more sophisticated applications. Some of these specialist applications can cost many thousands of pounds.

The demand for computer software spawned an entire industry that ranged from the 'one man and his dog' outfit to those set-ups that employed thousands of programmers. The software industry also captured the attention of the capital markets. Inflows of investment into the software industry have allowed many software businesses to expand to cater for the seemingly endless demand for their products. It was reckoned that users of those software packages would just continually renew and upgrade their applications. However those projected growth rates were never realised.

The IT industry is displaying what many business analysts call a typical business life cycle. It is not entirely clear what causes these booms and subsequent busts within certain industries. There are many theories that have been proposed to explain the business cycle. These range from the Random Shock Theory to Government-induced policies that might favour one industry over another. What is clear, though, is that cycles do occur but the timing of their occurrences is not predictable.

We are now starting to see the more evidence of this consolidation. Some might argue that the writing was on the wall some two years ago when Invensys (LSE: ISYS) disposed of Baan to Slumberger (NYSE: SLB). That notwithstanding, the recently proposed merger of CMG (LSE: CMG) and Logica (LSE: LOG) is just one of many unions that we can expect. Other companies may not be as fortunate in finding a suitable partner.

For those that lack a cogent business proposition, a complete exit from the market is perhaps the only course of action. Software consultants are perhaps more prone, simply by virtue of their low barriers to entry. This was exemplified by the decision of Terence Chapman Group (LSE: TCG) to liquidate and return cash to shareholders.

Over the years it has been shown that some businesses are better at weathering cyclical downturns than others. This forces weaker businesses to either withdraw or to participate in industry consolidation. This is the harsh reality of any business cycle but it does promote a healthier industry over the long-term. For some companies the IT revolution is over but for others it's just another opportunity-grabbing phase.