The IT Market: Time for mergers?
As competition is getting tougher, many Russian IT companies are merging to increase capital and market share.
Jul 28, 2003
According to IDC, the Russian IT market reached a volume of just over $4.7 billion in 2002. But players in the sector think that IDC's assessments of the market here are always on the cautious side. The vast majority of IT companies active in Russia are private firms that have no interest in providing exact information on the size of their businesses. An unfavorable tax environment and ever-increasing competition give Russian high-technology companies no incentive to be open about themselves.
The result is that attempts to measure the size of the IT market in Russia are very likely to always give lower figures than ones that would reflect the actual situation. The only statistic that everyone agrees on is that the sector is growing at a confident rate of 15-20 percent per year.
The Russian IT market today is characterized by larger and larger corporate and state IT projects, large-scale tenders for equipment supplies and a fast-growing market for professional services. Increasing competition makes the game more exciting, but it also requires companies to come up with significant financial and management resources.
This has stimulated the beginnings of a merger and takeover process in the sector. In addition, last year's sensational merger between Hewlett-Packard and Compaq tore down the last psychological barriers.
Until recently, there were very few cases of strategic investment being attracted to the Russian IT market, and what cases there were were often unsuccessful. This all changed in May 2003, however, when the news of three major deals got everyone talking about an imminent era of mergers and takeovers.
The first deal, which took place in May, involved major IT-solutions distributor and supplier Lanit's purchase of a controlling stake in DPI Group, which specializes in computer-equipment distribution, largely in the publishing-technology sector. DPI also represents the interests of Apple Computer and SGI in Russia.
"Until now, we took care of our financing needs mostly through loans," said Yevgeny Butman, the president of DPI. "This is no longer enough, and we have had to move away from loans to investment, which made the consolidation process inevitable."
For Lanit, the objective is also clear. Lanit's head, Georgy Gens, said that acquiring control of DPI is part of the firm's strategy of becoming "the biggest player on the Russian IT market" and even entering the world market.
Preliminary forecasts for 2003 estimate that the merged company's combined turnover would be at least $270 million, which would put it among the Top Five IT holdings in the country.
In the second deal, which could have an impact on the Russian personal-computers market, Kraftway, one of the five major Russian producers of personal computers and servers, acquired Forward Technologies, which has strong positions in the dual-processor-servers, graphic-workstations and data-storage-systems markets. The directors of the merged company say the acquisition was friendly.
"The acquisition of Forward Technologies was the simplest way for us to beat our competitors in the most-promising market sectors and make additional profits," said Kraftway General Director Alexei Kudryavtsev.
Renat Yusupov, the former owner of Forward Technologies, said the company could not have kept up sustainable growth on its own. As with the first deal, the acquired company had reached the limits of the growth it could finance through its own resources, while the strategic investor was attracted by the chance of increasing its market share.
The third recent merger actually took place in 2001, but was kept secret until May of this year. It turns out that the National Computer Corp. (NKK) holding has been working on the market for the last year-and-a-half with companies on its balance sheet that everyone had thought were independent.
The companies acquired by NKK are Aquarius Group, which is mainly involved in producing personal computers and servers, distribution companies Landata and OCS, both of which specialize in value-added distribution, and an OCS subsidiary, AND Project, which is an IT-services supplier.
NKK's newly revealed turnover for 2002 came to $324.7 million. According to a rating compiled by consulting company RosBusinessConsulting, this would put NKK in second place, coming behind only distribution group LC Group. NKK representatives say the deals were not about acquisitions or mergers of businesses, but about capital mergers. Nevertheless, here, too, the motive behind the deals is achieving a synergy effect by consolidating financial and creative resources.
Until today, large Russian IT companies have been more-or-less typical representatives of the country's medium-sized businesses, but now they have begun to look at strategic alliances as an effective tool for growth. They have little alternative, in any case, as a full-fledged stock market has not developed in Russia.
The result is that attempts to measure the size of the IT market in Russia are very likely to always give lower figures than ones that would reflect the actual situation. The only statistic that everyone agrees on is that the sector is growing at a confident rate of 15-20 percent per year.
The Russian IT market today is characterized by larger and larger corporate and state IT projects, large-scale tenders for equipment supplies and a fast-growing market for professional services. Increasing competition makes the game more exciting, but it also requires companies to come up with significant financial and management resources.
This has stimulated the beginnings of a merger and takeover process in the sector. In addition, last year's sensational merger between Hewlett-Packard and Compaq tore down the last psychological barriers.
Until recently, there were very few cases of strategic investment being attracted to the Russian IT market, and what cases there were were often unsuccessful. This all changed in May 2003, however, when the news of three major deals got everyone talking about an imminent era of mergers and takeovers.
The first deal, which took place in May, involved major IT-solutions distributor and supplier Lanit's purchase of a controlling stake in DPI Group, which specializes in computer-equipment distribution, largely in the publishing-technology sector. DPI also represents the interests of Apple Computer and SGI in Russia.
"Until now, we took care of our financing needs mostly through loans," said Yevgeny Butman, the president of DPI. "This is no longer enough, and we have had to move away from loans to investment, which made the consolidation process inevitable."
For Lanit, the objective is also clear. Lanit's head, Georgy Gens, said that acquiring control of DPI is part of the firm's strategy of becoming "the biggest player on the Russian IT market" and even entering the world market.
Preliminary forecasts for 2003 estimate that the merged company's combined turnover would be at least $270 million, which would put it among the Top Five IT holdings in the country.
In the second deal, which could have an impact on the Russian personal-computers market, Kraftway, one of the five major Russian producers of personal computers and servers, acquired Forward Technologies, which has strong positions in the dual-processor-servers, graphic-workstations and data-storage-systems markets. The directors of the merged company say the acquisition was friendly.
"The acquisition of Forward Technologies was the simplest way for us to beat our competitors in the most-promising market sectors and make additional profits," said Kraftway General Director Alexei Kudryavtsev.
Renat Yusupov, the former owner of Forward Technologies, said the company could not have kept up sustainable growth on its own. As with the first deal, the acquired company had reached the limits of the growth it could finance through its own resources, while the strategic investor was attracted by the chance of increasing its market share.
The third recent merger actually took place in 2001, but was kept secret until May of this year. It turns out that the National Computer Corp. (NKK) holding has been working on the market for the last year-and-a-half with companies on its balance sheet that everyone had thought were independent.
The companies acquired by NKK are Aquarius Group, which is mainly involved in producing personal computers and servers, distribution companies Landata and OCS, both of which specialize in value-added distribution, and an OCS subsidiary, AND Project, which is an IT-services supplier.
NKK's newly revealed turnover for 2002 came to $324.7 million. According to a rating compiled by consulting company RosBusinessConsulting, this would put NKK in second place, coming behind only distribution group LC Group. NKK representatives say the deals were not about acquisitions or mergers of businesses, but about capital mergers. Nevertheless, here, too, the motive behind the deals is achieving a synergy effect by consolidating financial and creative resources.
Until today, large Russian IT companies have been more-or-less typical representatives of the country's medium-sized businesses, but now they have begun to look at strategic alliances as an effective tool for growth. They have little alternative, in any case, as a full-fledged stock market has not developed in Russia.