2006: The year of the Private Equity Groups

The ICT industry worldwide continued to grow at between 6% and 7% in 2006 with the local ICT industry achieving a slightly higher figure. Growth rates similar to those of 2006 are expected for the next three to four years.

From an executive viewpoint, the top user ICT concerns are governance/compliance, an area which seems to have taken on even more significance over previous years; the mobilisation of applications; and the role of open source within organisations. From a Gartner perspective, one of its major concerns is that 80% of a company's IT spend is "dead money", in that it is not contributing directly to business growth and often is just "keeping the lights on".

In addition, two other characteristics have started to manifest in both the worldwide and local ICT markets. These are a return to a sensible level of new listings, which have been somewhat of a rarity over the past few years following the ridiculous situation in the late 1990s; and the increasing role of private equity companies within the sector.

On the international and local fronts, the year has again been dominated by sector consolidations. Locally, the continued telecommunications liberalisation and the continuing black economic empowerment (BEE) activity have also contributed to the many changes that have occurred within the South African and African ICT industries.

In the US, the technology-heavy Nasdaq seems to be ending this year around the 2450 level, hitting several five-year highs and at some stages 5% above the level ruling at the start of the year. Conversely, the JSE is running again at all-time highs of over 24000, numbers which are 30%+ up on the levels that were seen at the beginning of January.

For the first time since 1999, the JSE and/or AltX have seen a mini glut of new listings occurring in the latter half of the year, although there have still been several casualties through a combination of liquidations, consolidations, acquisitions and conventional de-listings. However, the key characteristics of 2006, apart from numerous consolidations, have been concerned with the continued move by listed and non-listed organisations alike, to embrace the principles of BEE, a situation fuelled by the spectre of the imminent publication of the ICT BEE charter; together with the continuing results of the "liberalisation" of the telecommunications sector that started in early 2005.

Additionally, as has been the case for the last few years, shares prices of many local technology stocks have grown with the favourable business climate. An analysis at the end of November suggested that of the +/-46 technology shares still listed on the JSE and AltX, only three shares were trading below 10c; while over 50% were now trading above R2, up from last year's 46%.

On the empowerment front, the ICT BEE charter has still not been issued and was awaiting the publication of the Department of Trade and Industry's Code of Good Practice before being finalised. This has now materialised and the charter should be issued early in 2007.

However, this delay has not slowed BEE activity and we have seen investments, for example, in Britehouse Group and Molapo Technologies by Safika Investments; Saratoga by Sekunjalo Investments; and SYSDBA, DVT and TuringSMI by Cornastone Enterprise Systems. Furthermore, other BEE initiatives were announced by Datatec in conjunction with African Legend Technologies, and by MultiChoice, Reunert, Sahara and UCS, to name but a few.

From a telecommunications perspective, the sector saw the launch of Neotel, together with further liberalisation of the industry and significant consolidation of the various players. These include, in particular, DataPro, which made several acquisitions including those of BizCall, Definity Telecom, NetraLINK and Orion Telecom. The introduction of number portability between the cellular operators was also introduced, while government announced InfraCo, a telecommunications company owning the telecommunications infrastructure of Eskom and TransNet.

The new listings this year have all been on AltX and included African Cellular Towers, Celcom, Dialogue Group, IFCA Technologies and SAB&T Ubuntu Holdings. SilverBridge Holdings also listed on AltX following a reverse take-over deal involving Synergy, and Zaptronix also moved to the AltX following its deal with Royal Bafokeng Finance. The last two companies were previously listed respectively on the development capital and venture capital sectors of the JSE. In addition, Datatec also undertook a secondary listing on London's AIM.

Fortunately, this year's attrition list was comparatively short and included Connection Group, which was bought by the JD Group; Elexir, following its exit from the sector; FrontRange, following its buy-out by a Californian private equity company; Idion, following its sell-off to IS Holdings III, another private equity company; Prism, following its purchase by Net-1 UEPS Technologies, a South African company listed on Nasdaq; and Venfin, following Vodafone's purchase of its Vodacom shareholding. OAI, a company whose shares had been suspended on the JSE for several years, was also formally de-listed. Still under suspension are the shares of Bryant Technology, CCG, Cyberhost, ShawCell and Top-Tech.

Other major local mergers, acquisitions or investment activities included several purchases by Datatec particularly through its UK arm, Logicalis; the purchase by Dimension Data of 51% of ICL East Africa, Namibian ICT Holdings and Unreal Technology AS of the Czech Republic; the acquisitions by EOH or its subsidiaries of Bromide Technologies, Dicoll Electronics and Integrate IT; the acquisition by MTN of Investcom; and the investments by Vodacom in G-Mobile Holdings and iBurst. In addition, Cape Empowerment Trust and Dynamic Cables restructured their various interests to leave the latter as a holding company for its gaming interests only.

In addition, Telkom SA still hasn't obtained approval for its proposed acquisition of Business Connexion and also lost its appeal in the Supreme Court against Telcordia Technologies.

Key appointments during the year included new country managers/GMs at Accenture, Cisco, Honeywell, Microsoft, Motorola, Nortel Networks and Unisys; new CEOs/MDs at arivia.kom (interim), Cell C, Jasco, Metrofile Holdings, Mint, MTN SA (interim), Neotel, SAES, Satori Group, Tarsus Technologies, Virgin Mobile SA and Weston AME. Resignations included those of Klaas Lammers, a founder and director of Datacentrix; Maanda Manyatshe, MD of MTN SA; Sajeed Sacranie, CEO of Virgin Mobile SA; and Guy Whitcroft, CEO of Tarsus Technologies.

New South African offices were opened by Axis Communications, Expand Networks, Kensense, Logitech, MicroStrategy, Nimbus, Packeteer, Panda Software, Quintica and Zebra Technologies.

On the ICT media front we saw the introduction of Unwired by the ITWeb Group; the withdrawal of the printed version of Tectonic Magazine; the perceived pull-out by Systems Publishers of its printed ICT publications; and of course, there was the usual flood of journalists "job-swapping".

Other major events included the signing into law of the Electronic Communications Act and the ICASA Amendment Act, the establishment of Britehouse Group, a wholly-owned BEE subsidiary of Dimension Data, and R&V Technology Holdings, a Venfin subsidiary, becoming its largest shareholder following the latter's disposal of its Vodacom investment; the sell-off by Dimension Data of its shareholding in Choice Technologies; the name changes of Interconnective Solutions to FoneWorx and UUNet SA to Verizon Business SA; the sell-off by Nedcor to Paracon of its last remaining ICT asset, Nihilent Technologies, and the proposed sell-off of arivia.kom.

From an awards viewpoint the key "winners" included Anthony Fitzhenry, CEO of Axiz, as IT Personality of the year 2006; and Kgabo Hlala, the former CIO of the Department of Home Affairs as 2006 Overall Top ICT Individual at the African ICT Achievers Awards.

Although, as yet, there are no IT companies listed in the "Top 200 Companies in Africa" from outside SA... ICT activity on the continent continues to grow.

Paul Booth, MD, Global Research Partners

Although, as yet, there are no IT companies listed in the "Top 200 Companies in Africa" from outside SA and only a handful of telecommunications companies included (Maroc Telecoms, Medi Telecom, MTN Nigeria, Nitel, Orascom Telecom, Orascom Telecom Algerie and Tunisie Telecom), ICT activity on the continent continues to grow with significant involvement coming from the Middle East. Specifically Celtel, the continent's third largest cellular company, continues to close the gap on MTN, having acquired 65% of Nigeria's V-Mobile earlier this year as well as increasing its stake in Sudan's MobilTel to 100% from 39%; and Gateway Communications raised $100 million for its growth into the continent.

Other major activities included the awarding of Kenya's second national fixed-line licence to a Dubai-based consortium led by VTEL; the 75% investment in Nitel by Transcorp; the appointment of Powercom as Namibia's second cellular player; the awarding of Egypt's third cellular licence to a consortium led by Etisalat; the purchase by Econet Wireless of a 65% stake in Burundi's ST Cellular SA; the purchase of 51% of Egypt's Raya Telecom by Vodafone Egypt; and Cameroon Mobile Telecommunications SA becoming that country's third cellular operator.

Key CEO/MD appointments included those at Areeba (Ghana), Celsys Zimbabwe, Celtel Madagascar, Gamtel, MTC Namibia, MTN Nigeria, Orange Botswana, Powercom (Namibia), Telecel Zimbabwe and Zambia Telecommunications.

Internationally, this year has been characterised by a renewed flow of IPOs worldwide - although well short of the dizzy-days of the late 1990s; together with an increased involvement of the private equity companies in the many consolidations that have taken place. In addition, IBM was dethroned by HP as the number one IT company.

Notable IPOs included those from Corel; Himax Technologies of Taiwan; Neuf Cegetel (France), Pegasus Wireless; Qimonda, the spin-off from Infineon Technologies; Verigy, the semiconductor test business hived-off from Agilent; and Vonage, a US-based telecommunications company.

In the enterprise software space, the year was again dominated by Oracle, which made several small acquisitions, However, the major move was made by Infor Global Solutions, which took over SSA Global to potentially position itself as the formal number three to SAP and Oracle. Other significant acquisitions in this sector included that of Manugistics by JDA Software.

From a networking perspective, the year was overshadowed by the $34 billion merger of Alcatel and Lucent Technologies, in a transatlantic deal that will hopefully succeed, since most previous deals of this nature have never prospered. Other take-overs included Sony Ericsson Mobile buying out the other investors in Symbian; while Nokia Siemens Networks was created by the merger of the two telecommunications arms of these two companies, and 3Com bought out Huawei's 49% share of its joint venture, Huawei-3Com.

From an IT services perspective we saw significant consolidation among the top 20 players. This included the acquisitions of Kanbay International by Cap Gemini; and WM-data AB by LogicaCMG. Furthermore, France's Sopra Group SA took over a division of Atos Origin and CSC acquired Datatrac Information Services, a federal contractor in the US. Additionally, Atos Origin seems to be the centre of attraction for several predator companies including Deutsche Telekom and HP.

The semiconductor segment was also a key area for consolidation in 2006 with AMD acquiring ATI Technologies ($5.4 billion), Freescale Semiconductor being taken-over by private equity group, Blackstone's ($6 billion), LSI Logic acquiring Agere Systems, and Philips spinning-off the majority of its semiconductor business to two private equity companies, KKR and Silver Lake Partners ($6.4 billion). In addition, I expect a private equity consortium led by the Carlyle Group to pick up Advanced Semiconductor Engineering in a deal valued at $6.4 billion and Toshiba to spin-off its semiconductor wafer business in a MBO backed by a consortium of private equity groups.

The storage space activity was dominated by EMC, which made numerous deals including that of RSA Security. In addition, Brocade took over McData, Tandberg Data ASA bought Exabyte, and SanDisk swallowed up its rival, M-Systems.

The telecommunications sector was again particularly active with the dominant acquisition, valued at almost $90 billion, being that of AT&T and BellSouth. Other smaller deals culminated in Ntl snapping up Virgin Mobile.

Apart from the above, other major acquisitions/mergers included Aberdeen Group by Harte-Hanks, Hummingbird by Open Text, Pixar Animation by Disney ($7.4 billion) and Symbol Technologies by Motorola.

There were also numerous acquisitions not specifically mentioned by a handful of the key IT players such as CA, Cisco, Google, HP, IBM, Microsoft and Motorola.

Major international appointments included Ron Hovsespien as CEO of Novell, Mark Hurd as chairman of HP in addition to his CEO role, Edgar Masri as president and CEO of 3Com, Dave Roberson as CEO of Hitachi Data Systems, Patricia Russo as CEO of the Alcatel/Lucent merged entity, and Jonathan Schwartz as CEO of Sun Microsystems. Key resignations included Patricia Dunn, chairman of HP, and Scott McNealy, CEO of Sun Microsystems.

Other major international activities included the settlements by Microsoft with the European Commission (supposedly) over anti-trust issues, and IBM moving the global HQ of its procurement arm to China.

When it comes to IT, change may well be the only thing CIOs can depend on in 2007. That's what the editors at "CIO Insight" found when they took each of the 13 surveys they conducted in 2006 and put them under the microscope to project next year's 30 major trends. 2007's trends are listed into four different categories: strategy, management, security, and technology. But they are all closely related. (For details go to www.baselinemag.com)

Strategy

1. Process improvement will be job number one.
2. IT works on closing the sale.
3. Companies make their Web sites more engaging.
4. Customer service gets a tune-up.
5. Companies put their mounds of data to work.
6. Information governance gains momentum.
7. CIOs strive to be strategic.

Management

8. The division between IT and business will diminish.
9. CIO compensation keeps climbing.
10. IT organisations will keep growing.
11. CIOs struggle to find business-savvy technologists.
12. Outsourcing changes IT management.
13. Outsourcing growth slows.
14. Offshoring shifts from India.
15. Companies invest in IT leadership.
16. Demonstrating ROI will remain a struggle.

Security and risk

17. No abatement of IT security threats.
18. Security concerns turn users away from Windows.
19. Security morphs into risk management.
20. Compliance achieves what government intended.
21. Compliance spurs financial process improvement.

Technology

22. The move to a new architecture marches on.
23. Enterprise applications start losing their lustre.
24. Data quality demands attention.
25. IT reluctantly embraces Web 2.0.
26. IT innovation loses traction.
27. Business process management services and software will frustrate users.
28. For business intelligence, the best is yet to come.
29. IT organisations start going green.
30. Dissatisfaction with vendors is on the rise.

Internationally, apart from those mentioned above, next year will see a continuation of the segment consolidations that have been particularly prevalent over the past two or three years. I expect one of the larger software companies, maybe SAP, will take over Open Text. HP will substantially add to its software and services portfolio by buying at least one IT services company such as CSC or Atos Origin. 3Com will be acquired by a private equity company and Cisco will tie up a Russian link.

Locally, next year should see resolution of the Telkom/BCX deal or if that fails, another bid for BCX coming from another source and/or Telkom seeking another IT services partner; several new IPOs including Labat Traffic Solutions and the IT interests of Sekunjalo; a clean up of the shares that are suspended on the JSE except those of Bryant Technology and Cyberhost, companies that I expect to re-emerge in some new listed form; and some new developments involving our two main cellular players, MTN and Vodacom.

Although 2006 experienced a plethora of consolidation activities, 2007 is likely to be even more disruptive from this perspective. I expect much more involvement of the private equity groups within the ICT industry both locally and overseas.

However, change is nothing new for our industry and my message of last year, be bold, still stands.