Value-added reseller Morse [MOR.L] is acquiring SAP consultancy Diagonal [DIA.L] for GBP50.2 million in its biggest step yet towards building its IT services capabilities. This latest deal is just one of a growing line of mergers in the IT services market, as scale becomes an increasingly important factor in choosing providers.
Morse has agreed to buy Diagonal.
The merger is expected to boost both Morse’s and Diagonal’s attempts to return to profitability, after a few difficult years in which the former has been forced to increase its higher margin services business and the latter has been pulled down by its struggling secure networks division. Diagonal’s executive chairman Malcolm Gloak said Morse’s size will enable Diagonal’s business lines to perform better, referring to cross-selling opportunities and access to larger clients.
Morse will pay 55 pence per share, a premium of 18.3% on Diagonal’s closing price on July 12, 2004, a day before the offer announcement. The price is the same as that offered for the company by Microgen, which offered between 54 pence and 55 pence per share for the company on June 7. However, Diagonal’s board snubbed the offer, and Mr Gloak has since told ComputerWire that it was unsure about Microgen’s ability to meet the upper limit of its offer, and preferred Morse’s offer, which has a higher cash component.
Morse, which made 31% of its total GBP351 million 2003 revenue in professional services, should see its services business increase by half based on Diagonal’s 2003 full-year revenue of GBP56.3 million.
One of the strategic challenges facing the sector and industry is one of size. Large customers are looking to reduce their number of suppliers as a whole, therefore Morse undoubtedly brings that [scale] in term of the quality of their entire covenant, Mr Gloak says.
Mr Gloak’s comments reflect the general mood of the services market in Europe. Consolidation is rife, particularly in the SAP services sector. There were more than 10 SAP services-related acquisitions in the first half of 2004, almost all of mid-size companies. The list of purchasers include Capgemini, Cognizant, Softlab, and even SAP itself, which is in the process of acquiring all the shares of SAP SI and integrating it into its internal services division.