KUHN CAPITAL Monday, October 23, 2017
Dispatches from the front

Welcome to the Age of Tech Maturation
(4/5/2005)

S&P Ratings Services thinks the tech industry’s 2005 financial performance will look a lot like 2004’s. This fact and other developments support the perception that we're entering the Age of Tech Maturation.

S&P sees software and tech services sector growth in the “mid-single digit” range, with VoIP, 300mm chips and 3G wireless standards generating greater sales gains.

While hardly exciting, at least the green eyeshades like software and tech services’ current steady-as-she-goes pace, as different as this is from the go-go years of yore. (They’re also attracted to the long-term contracts with visible, healthy clients that the larger players boast.)

We agree that for most software and services vendors, incremental growth will be as good as it gets. But we also believe that another spending recession could make even that forecast optimistic.

However, this isn’t bad news for M&A. Lots of software/services companies have frugally conserved cash in reaction to the post dot.com and 9-11 demand recession: now they’re looking to acquisitions for growth and a chance to squeeze competitors with economies of scale.

Consider:
* Symantec’s huge $13.5 billion purchase of Veritas;
* IBM’s $1.1 billion acquisition of Ascential; and,
* Oracle’s $10 billion battle for PeopleSoft, its pending $700 million purchase of Retek, and its declaration of war on SAP (attaboy, Larry!).

Cash, moderate sales growth and M&A activity are classic indicators of maturing industries. As such maturation proceeds in the software/services sectors, we should therefore also see rising emphasis on cost rationalization versus innovation. And we'll increasingly see acquistion targets valued on the basis of their cash flow rather than on blue-sky growth forecasts.

If anything, the pace of rationalization and the resulting falling prices for tech services clients in the US should move ahead faster than usual with global pressure from cheap-labor offshore competitors. Eventually, some portions of the services business may resemble commodity production lines, this to the delight of end-users and to the dismay of smaller vendors.

In sum, now is a better time than most for buying and selling. We're here to help.

Ryan Kuhn


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