A new national champion has been created in the Russian IT services market with merger between local players IBS and Borlas.
The two companies will combine to create a new organization with joint 2006 sales of $370m with a headcount of 2,700 employees. More than half the company’s revenue comes from services, with the workforce including some 1,500 consultants.
IBS and Borlas claimed that the move created the latest IT services provider in Russia and eastern Europe. M&A activity has accelerated in the region as suppliers look to build the scale and credibility they need to pitch for major software development projects, particularly to act as offshore partners for western organizations.
Last month, Latvian applications outsourcer Exigen Services expanded its presence in central and eastern Europe through a merger with StarSoft Development Labs. In September, Russia’s Epam Systems strengthened its position as one of the country’s largest software outsourcing services vendor with the takeover of Vested Development, which created a company with more than 2,200 staff and over $70m annual sales.
Sergey Karelov, chairman of Russian IT industry association Linex, told Computer Business Review: I don’t think it’s an overstatement to say that the merger is the most important deal in the Russian IT services market to date. Many analysts evaluating the maturity level of Russian IT services market stress that one of the main deterrents of its development is an absence of big enough IT services providers. There are such national IT services leaders in India, China – now such national IT services leaders could appear in Russia.
IBS is the larger of the two companies, with 2006 sales expected to reach $277m, while Borlas’ sales last year were $115m. The combined company hopes to achieve cost savings of 10% through the merger, and has earmarked a stock market flotation for 2008.
This is good news for Russia’s nascent IT services industry.
While the country does not have any realistic hope of overtaking India or China as the world’s premier offshore sourcing location, Russia is rapidly carving itself a niche as a reliable source of low-cost, but high-quality and high-level programming services.
Russian services vendors have enjoyed notable success in providing development and R&D work for Western software and technology companies, while bluechip accounts such as Deutsche Bank, Boeing, and Shell have all sourced projects from Russian services providers in recent years.
As Karelov points out, Russia needs large, credible suppliers to emerge if it is to attract significant investment from North America and Western Europe, and the IBS/Borlas merger is a step in the right direction. An IPO would be a further feather in the cap of IBS/Borlas, with clients reluctant to commit to big projects with suppliers unless they can clearly demonstrate financial stability.
Karelov said that there is little overlap between the activities of IBS and Borlas but warns that successfully integrating together the two organizations will be challenging. However, the deal is likely to prompt further M&A activity among Russian and East European IT services companies, as they compete for business and human resources against the region’s new leader.