NTT DATA recently announced the long-planned merger of its international business with NTT Ltd., the overseas ICT unit of Japanese telecoms giant NTT. The combined NTT DATA and NTT Ltd. will have revenues of ¥3.5tn (~$26.2bn) and 180k personnel.

With this move, NTT unites its two ICT units into a single entity, driving its vision of One NTT. The merger will remove some overlapping capabilities and should help drive revenue synergies by FY25. The larger NTT DATA organization will spearhead NTT's technology presence in enterprises.

The merger comes when NTT DATA has completed one cycle of its strategy for overseas growth. After several significant international acquisitions (Dell Services, everis, itelligence, and Value Team), the focus turned to cost savings, portfolio management, and through its Global One initiative, driving coordination across the firm. In FY21 (the year ending March 31, 2021), NTT DATA's overseas business reached an EBITA margin of 6.5%, a notch below its 7.0% target.

The addition of NTT Ltd. Doubles NTT DATA's Overseas Presence

With around $10bn in revenues and 38k employees, NTT Ltd. more than doubles NTT DATA's international business to $18bn.

One of the primary benefits of the merger centers on cost synergies. NTT DATA expects to achieve ¥30bn (~$150m) in savings by FY25 (the year ending March 31, 2026), improving margins in its overseas business. NTT DATA now expects to reach an EBITA margin of 10% in its overseas business, a 50% improvement. The absorption of NTT Ltd. into NTT DATA (and its transformation) will take time, with the synergy target suggesting a fast two-year effort from the day the merger is operational in July 2023.

NTT Ltd. Brings A Diverse Network and IT Infrastructure Portfolio

From a service portfolio perspective, NTT Ltd. brings a wide range of network and connectivity services, hardware and related services, data center hosting, IT infrastructure services, and resales. The company is particularly well known outside Japan for its Dimension Data business, a significant acquisition in 2o19, which brought in around $4.0bn in revenues and 11.5k personnel at that time.

Dimension Data, itself a regular acquirer, had strengthened its network capabilities through multiple transactions, including Nextira One. It had also expanded into application services in APAC, mainly in ANZ and Singapore.

NTT Ltd. brings a diversity of attractive and perhaps some less attractive IT and telecom/network services capabilities. The company started unifying its capabilities back in 2019 when it regrouped all its units under the NTT Ltd. brand. This transformation continues, with NTT Ltd. still going through a portfolio and cost transformation to drive margins up.

NTT Prioritizes the U.S. for Further Expansion

Last October, NTT DATA revised its mid-term plan, targeting ¥4.0tn in revenues in FY25. The services portfolio will focus on five primary offerings: Cloud, Data and Analytics, Security, ADM, and Enterprise Applications Services. Similarly, the target markets are five industries: healthcare & life science, automotive, insurance, telecom, and banking.

The structure of the new arrangement is interesting: parent company NTT will own 45% of NTT DATA's overseas business, with NTT DATA controlling the remaining 55%. It is unclear why NTT did not increase its share in NTT DATA directly rather than holding a stake in the overseas business. NelsonHall expects a change in the capital structure in the mid-term.

Acquisitions will be on the agenda. NTT DATA feels that, despite its ¥476bn FY21 (~$3.5bn) revenues in the U.S., it still has room for further expansion, with an ambition to expand its capabilities in digital.

Indian offshoring is also likely to be on the agenda. NTT DATA, despite the Indian presence brought by KEANE and Dell Services, still needs to grow in the country, especially considering its U.S. ambitions. Expect to see acquisitions to expand delivery capabilities in India.