The number of mergers and acquisitions in the IT services sector grew by 14% in the first quarter of 2007, continuing the trend toward consolidation that began at the end of 2005.
In the three months to the end of March, ComputerWire tracked a total of 89 M&As involving IT services vendors, compared to 78 in the same period the previous year. The total was higher than in any quarter during 2006, surpassing the 83 deals recorded in both the second and third quarters last year.
The biggest deal of the first quarter came in the business process outsourcing space, where investment services provider State Street acquired smaller rival Investors Financial Services in a stock deal worth a whopping $4.5bn. State Street is a specialist financial services sector outsourcer, handling functions such as research, investment management and trading services to other banks.
No other M&A in the first quarter was valued at over $1bn, but two came in at over $500m, as shown in the table below. US-based Keane, long thought to be a potential takeover target, was finally snapped up but the identity of the purchaser caught the market by surprise. Caritor, a significantly smaller IT services vendor, will finance the reverse takeover through a combination of equity contributed by Citigroup Venture Capital International and debt financing from Citigroup Global Markets, UBS Securities, and Bank of America Securities.
The proliferation of deals involving private equity firms was one of the features of the M&A market in Q1. Atlantic Bridge Ventures led the way, paying over $500m for the telecom products division of European giant LogicaCMG. After a sale process lasting six months, United Utilities finally got rid of BPO division Vertex to a consortium of private equity companies, led by Oak Hill Capital and including GenNx360 and Knox Lawrence International.
While private equity firms have been extremely acquisitive in the technology sector as a whole over the last few years, they are increasingly targeting the IT services space, attracted by the predictable revenue streams generated by long-term outsourcing contracts and the current healthy growth forecasts for the services market.
A quarter of the deals tracked by ComputerWire during the first quarter had an offshore element to them. These included acquisitions by Indian vendors such as Firstsource, which bought US-based claims processor BPM, Tech Mahindra, which picked up iPolicy Networks, Genpact, which snapped up ICE Enterprise, and WNS Global Services, which paid $65m for analytics services firm Marketics.
China was another area of activity, reflecting its growing importance as an offshore location. A number of Chinese vendors announced takeovers outside their domestic market during the quarter, including HiSoft and CDC, which both picked up UK-based companies, and Longtop, which bought US-based Minecode. ChinaSoft expanded its local operation with a move for Hinge Global Resource, while US-based Achievo, which provides the majority of its services from centers in China, continued its expansion in the region with the takeover of colorfully monikered Chinese player Beijing Sun-Shines Technology.