Escape from the Dark Ages

Hard hit by a combination punch of depressed stocks and poor earnings, the Web-integrator sector is ripe for consolidation. But dont expect any miracles from such actions, because buyers appear to be few and far between.

Still bruised by a disastrous Q4, many Web integrators are cutting staff and closing offices to keep their businesses afloat. In some cases, the desperate ones are quietly looking for buyers.

While a few companies may find a good suitor, most hobbled players are not expected to find their white knights. A more likely scenario calls for strong companies like Electronic Data Systems to handpick prized Web talent from weaker firms.

“You will see some thoughtless consolidation,” predicts Chad Gallant, co-managing director of Icon Medialab in New York. “Two weak companies will come together to form a larger weak company.”

Looking forward at the state of Web integrators, Gallant paints a picture of a fractured landscape where consolidation is not going to be highly rewarded. “In this climate the stakes associated with consolidation outweigh the benefits. The primary reason why this sector is in bad shape is because companies thought more about providing value for themselves than their clients,” Gallant says.

In fact, consolidation, for some public and privately held integrators, will be a last-ditch attempt at survival. “Consolidation will not be driven by a lack of demand,” says Heiner Rutt, president of Proxicom. “It will be driven by a lack of a reference network, and driven by a lack of availability of funds.”

Dean Hopkins, CEO of Cyberplex in Toronto, sees plenty of merger activity ahead. “There is a shakeout happening. The bankers are thick with a lot of M&A activity and the conditions are ripe for players to buy and merge with each other,” says Hopkins.

But expect trouble with consolidation. “In the I-builder space there is going to be some carnage, and its going to take the form of consolidation. You will see other firms evaporate because of their quality issues,” says Eric Pelander, senior VP at Mainspring in Cambridge, Mass.

On the whole, consolidation may only present a slim uptick for some companies as a way to raise shareholder value and retain employees. But companies with deeply depressed stock values will see market consolidation the hard way: Stronger companies will be best positioned to grab the top talent from the weaker players.

“Many of these companies are going to go out of business because there is an excess of skill for pure Web design,” says Hank Satterthwaite, president and CEO of Snickleways, a Web integrator based in New York. “The stronger companies are selectively taking away the talents of the weaker players.”

Icon Medialabs Gallant agrees. “There will be a cherry-picking of talented individuals or teams with a specific skill within the weaker companies,” Gallant says. “The weaker companies will get smaller and smaller, and must become microcaps.”

In all, the looming problems are not expected to easily dissipate. “Its tough days ahead for the companies in our space,” says Rajan Nair, COO of SeraNova. “We have to forget about the stock market and focus on getting the business back on track.”

The winners will be those that stay focused and keep the clients needs in the forefront. Oh, and profits will certainly help.