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Dell Services: the Glue for "One NTT DATA" In North America

Dell Services is a strategic acquisition, though an expensive one

Yesterday, NTT DATA Inc. closed its acquisition of Dell Services, seven months after its initial announcement.

The acquired entity, now called NTT DATA Services on an interim basis, has some obvious benefits. For example, it:

  • More than doubles NTT DATA Inc.’s revenues from $1.7bn to over $4bn
  • Significantly strengthens the infrastructure/cloud business of NTT DATA Inc., which traditionally is supplied by sister companies NTT Com (telecom services, datacenter, and hosting), security (NTT Security) and IT infrastructure services (Dimension Data). Dell Services generated $1.68bn in IT infrastructure and cloud revenue in its FY 2016 (to January 29, 2016).
  • Brings in sizeable applications and BPO businesses (~$1.16bn revenue in FY16), with specific strengths in healthcare (~50% of revenues of the former Perot Systems). The BPO capability, in particular, will significantly boost NTT Data Inc.’s own capabilities
  • Brings in industry-specific capabilities in sectors such as healthcare
  • More than doubles NTT DATA Inc.’s India delivery capabilities, from ~12k to ~26k personnel.

So, Dell Services is a strategic acquisition - but at $3.06bn, it is expensive.

Perot Systems did not thrive as part of Dell. After Perot Systems became Dell Services, its financial performance was mixed. FY 2016 revenues were down 5% to $2,84bn (similar size to Perot Systems in 2008, and in May 2010, Dell said its Services business with the addition of Perot) was generating quarterly revenues of $1,891m). And its operating margin was just 5.3%.  The acquisition is also margin dilutive. NTT Data Inc. is generating an EBIT margin of over 10%.

Our perception is that some of the distinctive capabilities of the former Perot Systems became almost invisible when it became part of Dell. As part of NTT DATA, it is back to being a services pureplay, and the application and BPO businesses, in particular, are likely to receive more investment.

Japanese Owners take long-term view

NTT DATA continues to execute on its active M&A strategy. Thanks to its Japanese ownership and financial backing of its majority shareholder NTT Group, NTT DATA tends to take a long-term view, focusing on revenue synergies rather than margin expansion in the near-to mid-term. For NTT DATA Inc., for example, the ambition was to achieve revenues of $3.4bn by FY16. With the addition of Dell Services, this target will be surpassed.

‘One NTT DATA’ integration ambitions

An NTT DATA priority in recent years has been to absorb and integrate all its acquisitions to a federated region-centric structure that has several areas of coordination, evolving its operating model from a holding company scenario.

In North America, NTT DATA Inc. has been relatively successful in integrating the likes of Keane, Intelligroup, and Optimal Solutions. The integration of Dell Services, a business twice its current size, poses more of a challenge. In addition to its size, it also means an organizational realignment to a vertically-oriented go-to-market. However, CEO John McCain highlights the project management capabilities brought in by Keane. And the restructuring is not being done with undue haste: Dell Services former CEO remains until January to support the handover, and there are five more months for the new organizational structure to be implemented (the new leadership becomes effective from April 1, 2017).

Dell Services will clearly be the glue for ‘One NTT DATA’ in North America.

This is not the end of NTT DATA's M&A activity

“The acquisition of Dell Services is another step toward achieving our vision of becoming a top five global IT services leader.” Toshio Iwamoto, President and CEO, NTT DATA Corporation

NTT DATA is currently a Top 10 IT services provider: its growth ambitions remain.

In international markets, NTT DATA remains a series of geographical organizations, with a presence in Germany, Spain/Latin America, and Italy, rather than an integrated firm.  It has a gap in the key IT service market of the U.K.

Will NTT DATA continue to make small to mid-sized acquisitions such as Spain’s everis, or, perhaps, like it is doing with Dell Services, acquire a more significant player which could be the glue for an integrated One NTT DATA EMEA?

Will there ever be a global One NTT DATA? We don’t think this is likely in the short term.

Dominique Raviart and Rachael Stormonth

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