Liquidations continue to surge

Almost 100 IT companies closed their doors last year, despite growing signs that the economy is recovering from a recession that shook the global economy almost three years ago.

In 2008, the world saw one of the worst global crises since the Wall Street crash of 1929 led to the great depression. The most recent recession resulted in the collapse of global banking giants, such as Lehman Brothers.

SA did not escape the global downturn unscathed, with several companies closing their doors because of the aftermath.

ICT company collapses in the past few years include Faritec's largest unit, Square One, Dialogue SA, Eclipse Networks, Masana Technologies, Music for Pleasure and Goal Technology Solutions.

However, despite indications that the economy is picking up strongly and returning to growth, IT liquidations in 2010 almost doubled, compared with the number of companies in the sector that closed their doors in 2009. More companies could collapse this year as the sector lags the overall economic recovery.

Last year, 99 companies in the computer and related activities sector were in the process of being liquidated. Of these, nine were in provisional liquidation, 80 voluntarily applied for liquidation, and 10 were put into final liquidation, according to figures provided by the Companies and Intellectual Property Registration Office (Cipro).

In 2009, more than 50 ICT companies closed their doors last year; double the number of collapses in 2008, according to figures provided by Cipro. SA's economy started recovering in the third quarter of 2009, when quarter-on-quarter growth was 0.9%. Before the growth figure, the economy had retracted for three consecutive quarters.

The rise of liquidations in the IT sector is at odds with the general business environment, where liquidations have slowed. According to Cipro, a total of 3 023 companies and closed corporations were liquidated last year, which was 611 collapses less than in 2009. In 2008, 2 408 companies and closed corporations folded.

Econometrix senior economist Tony Twine says liquidations in the IT sector should have declined last year, in parallel with the general decline of collapses. He attributes the higher number of ICT liquidations to a lag effect within the sector, which could see more companies folding this year, despite the economic recovery.

Twine says the 12-month lag in the IT sector “implies that things are nearing the worst point for liquidations, but we may not be there just yet”. He says one of the reasons the sector could be lagging is because of contracts that were entered into before the plug was pulled on spending.

In addition, the recession could have led to consolidation within the industry as firms sought a stronger position to defend themselves from the spending slowdown.

Being consolidated, says Twine, is “a much more secure position from which to watch the recession go by as well as its lagged effect”. Consolidations in the sector will continue for as long as liquidations happen, says Twine.

Hannes Fourie, senior analyst for systems and infrastructure at IDC, says there could be a number of factors contributing to the higher number of collapses, including increased competition in the sector.

Fourie speculates that larger players with better access to products and finance could be taking away business from the smaller firms. He says the hardest hit area could be the services sector, which is the most aggressive growth space in the IT sector at the moment.

Spend in the IT sector started picking up again in the second half of last year, Fourie says. During the difficult times, many companies held off on new projects and sweated their assets more, extending the life span of computing equipment.

Despite the increase in investment, 13 companies folded in December alone, which was the third-highest number after April, when 17 firms collapsed. The bulk of the liquidations took place in the first six months of the year, with 58 companies collapsing. “If you were suffering for 18 months, you probably wouldn't make it,” notes Fourie.

Looking ahead, Fourie does not expect liquidations to continue increasing at the same rate this year, pointing out that IT spend growth will more than double expected gross domestic product growth. IDC expects local IT spending to hit $14.4 billion this year, up from $13.4 billion in 2010.

Fourie says SA will not see another 100 companies fold this year, although there will be consolidations as companies try to buy market share, and the sector may also see new entrants.