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M&A Activity in 2015 (Part 1): $10bn to $15bn IT Services Vendors Drive Activity

Reflecting slightly improved macro-economic conditions, 2015 was an active year for M&A activity in the IT services industry. The largest acquisition - for some years - was that of IGATE by Capgemini. And there was a large number of small to mid-sized transactions.

When analyzing this active M&A activity, several findings are striking:

  1. In spite of all the intensive discussions about portfolio management and digital transformation services and platforms (as software products or BPaaS), most of the M&A activity remains about scale and driven by IT services vendors in the scale of $10bn-$15bn in revenues
  2. M&A in digital transformation services was limited and driven mostly by Accenture and to a lesser extent by the Deloitte network
  3. Unsurprisingly, the largest IT service vendors globally have no appetite for M&A in IT services: IBM, HP and Fujitsu, have not made IT services acquisitions in years (with the exception of IBM investing in IaaS). The exceptions were CSC, which is acquiring as it reinvents itself, and Atos, looking, like Capgemini, to gain scale in the U.S.
  4. Consolidation in the IaaS space has begun.

Bulk of Transactions in 2015 Was About Scale and Driven by $10bn to $15bn Firms

The largest M&A of 2015 was with Capgemini and IGATE. The extremely expensive ($4bn in cash plus IGATE’s net debt of $400m) transaction was in line with Capgemini’s strategy to gain scale in the U.S and increase its presence in India. Capgemini now has 100k personnel in its global delivery network; it is now almost as large in India as HCL Technologies and Tech Mahindra. Capgemini will be on a pause for large acquisitions for the next three years, focusing on reducing its debt level.

Atos also had an active M&A year. The company continues to rely on acquisitions to fuel topline growth. Atos now seems to be targeting one to two significant transactions per year (2014: Xerox ITO and Bull; 2015: Unify and Equens pending). After Unifys and Equens, Atos will have very little debt or will be cash positive so acquisitions are very likely in 2016. Atos continues to favor consolidating its main service lines e.g. IT infrastructure services and payment services/commercial acquiring and main geos e.g. Europe and U.S. It is one of the firms (along with TCS and Cognizant) interested in Perot Systems.

Two serial acquirers, NTT DATA and CGI, were quieter this year:

  • NTT DATA’s M&A strategy to date has been mostly geography-led, expanding systematically in geographies where it is not present; currently Asia. Following its everis (€600m in revenues) acquisition, there was little activity in 2015
  • CGI has now its net debt at CAN 1.8bn: the company has been actively looking for some time at large opportunities preferably in the U.S. financial services and utilities sector, and also potentially in the U.K., and in software products.

We are expecting more activity from both NTT DATA and CGI in 2016. And there is the Perot Systems situation, with Dell reported to be looking for $5bn (making it, like IGATE, a costly buy)

Largest IT Conglomerate Have No Appetite for IT Services

Looking at the largest IT firms globally (who also have software and hardware businesses) which target enterprises (and not the consumer market): HP, IBM, Microsoft, Cisco, Dell and EMC and Oracle: none of those firms has any appetite for IT services, apart from IaaS cloud:

  • IBM made its first acquisition for GBS since the PwCC transaction in 2002… Meteorix in the U.S., a Workday services specialist with a headcount of 200!
  • Fujitsu has not made any acquisition since KAZ in Australia in 2009
  • Microsoft, Cisco and EMC have no interest in diluting margins by acquiring IT services
  • Dell in the wake of its acquisition of EMC will float SecureWorks, its managed security services business ($245m in Q1-Q3 2015 revenues) and is examining the sale of its non-support enterprise service business (largely the legacy Perot Systems business) it had acquired in 2009

M&A Acceleration in U.S. Federal Services, Scale

After years of declining revenues, the U.S. Federal IT services industry is expecting flat growth in 2016. So far the industry has done a good at maintaining its margins at a high level. Yet, it seems to have decided it needed to grow in scale to survive.

While there have been plenty of small to mid-sized acquisitions in previous years, 2015 saw some major M&A transactions. CSC’s North American Public Sector spin-off acquired SRA ($1.4bn in revenues) to form CSRA, the largest government services unit since SAIC’s spin-off of Leidos. CACI purchased the L-3 Communications’ government service unit, NSS (revenues of $1bn).

There are more transactions ahead: Lockheed Martin is aiming to sell government assets representing $4.5bn in revenues: CACI is rumored to be leading discussions at around $2bn. If it occurs, this would drive CACI’S revenues to ~$9bn, well ahead of CSRA (~$5.5bn PF), Booz Allen Hamilton (~$5.2bn), and Leidos (~$5bn).

Look for our next blog on this topic, "M&As in 2015 (2): Few Vendors Active in Digital Transformation. IaaS Consolidation of the Industry Begins".

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