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Software Industry Primed for Consolidation

Companies across the country -- which once spent freely when there seemed to be no end in sight for the economic boom of the late 90s -- are tightening their belts and becoming more conservative with their purchasing decisions. That thrifty stance is having a ripple effect, and the software industry is not immune.

Gartner Dataquest Monday forecast that the industry is headed for a period of massive consolidation as buyer behavior remains cautious and focused on the bottom line.

Gartner said that more than 25 percent of leading software companies have become the subject of merger, acquisition and divestiture (MAD) over the past three years, and the firm expects it will reach 50 percent over the next three years.

"In many cases, strong brand names will survive under a new owner where the equity justifies it," said Joanne Correia, vice president for Gartner Dataquest's Software Industry Research group. "The demise of software vendors will also become more commonplace as the assets left by some failing companies don't attract a new owner, however cheap they are to acquire. Vendors should be actively seeking MAD opportunities while they still have substantial residual or purchasing value."

Gartner's analysts predicted the worldwide software license market will be flat in 2001, show 4 percent growth in 2002 and recover to 8 percent growth in 2003. Things are a little more grim for the worldwide application software license market, which is projected to have declined 6 percent in 2001, decline 1 percent in 2002 and grow 8 percent in 2003. Meanwhile, the worldwide infrastructure software license industry is predicted to drop 3 percent for 2001, but recover with 6 percent and 8 percent increases in 2002 and 2003, respectively.

But the story for software is not all bad. Following the events of Sept. 11, many companies have given security increased priority, and the firm forecast continued double-digit growth for the security software segment, though growth will be slower than it was in 2000.

Gartner said worldwide security software revenue grew by 25 percent in 2000, and projects it will have grown by 12 percent in 2001. The firm predicts 18 percent growth in 2002 and 16 percent growth in 2003.

"The events of Sept. 11 have and will continue to drive growth in the security software market, despite a tough economic environment," said Colleen Graham, industry analyst for Gartner's Software Industry Research group. "While enterprises struggle to adjust to a shaken U.S. economy, companies that are tightening their budgets and re-prioritizing technology products will move security initiatives from the IT wish list to the list of IT must-haves."