| | How much credence should
we place on bid rumours?
Everyone was agog a
month ago at the thought
that Infosys would
swallow Capgemini. A
few days later someone
told me Xansa was on the
market.
Then an old rumour
resurfaced that Siemens
Business Services was
about to buy Atos
Origin, which prompted a
very unusual and
explicit denial from the
Siemens CFO.
It seemed everyone
was crying wolf – and
then Xansa promptly sold
itself to French group
Steria.
So is this 'deal
season' as some have
claimed – or are all
these rumours merely
echoes of the genuine
Xansa deal? Rumours of
this kind generally have
two elements: a kernel
of truth and an element
of logic.
One fact we can agree
on is that there is a
lot of activity at the
lower end of the market.
Many smaller consultancy
firms have rapidly gone
from start-up to the top
of their initial
“S-curve”. Growing
consultancy firms is a
lumpy business: most
people agree that it
gets tough to go past 80
consultants, and then | |
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| | again beyond 200. Merger
or acquisition can be a
very attractive
alternative for founders
in this position.
Such firms can be
very attractive buys,
particularly for larger
firms trying to build
out their global
footprint against a
background of a radical
shortage of experienced
consultancy hires.
I also suspect
there’s a lot of scope
for mergers between
these smaller firms: I’m
often struck as I move
around the market by how
many of these firms seem
to be singing from the
same hymn book in terms
of culture, hiring
patterns and approach to
client projects. Two
firms at that difficult
growth point where new
management approaches
and a big investment in
infrastructure are
needed to underpin
expansion might do worse
than to throw their lot
in with each other.
As we move up the
scale, things become
more difficult. The
element of logic – and
possibly a bit of
wishful thinking – comes
into the
Infosys-Capgemin rumour.
There’s long been a
tension between what we
could term the East and | |
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| | West of the consultancy
and outsourcing
industry. So far the
established consultancy
relationships of the
Western consultancy
firms, combined with the
relative ease of
acquiring outsourcing
resources in India and
China, would seem to
have had the edge. In
this respect the tight
recruitment markets in
Europe and the States
would seem to be working
to the Western firms’
advantage, even if they
are still a constraint
on business.
So there’s a logic to
the Indian players
getting the chequebooks
out, even if, like
Infosys, they may not
have a track record of
acquisition to draw on.
I still couldn’t see the
Capgemini acquisition:
Capgemini has only
recently got all the
ornaments back on the
shelves after a
turbulent few years
following the Ernst &
Young acquisition, and I
can’t see any way in
which the prospect of a
further integration
could have anything but
a negative effect on the
employees.
The problem for the
Indian firms as I see it
is that a major purchase
of a big European or | |
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| | American brand might be
a bit much to swallow in
terms of integration,
and would tie the new
unit up in internal
wrangling while its
rivals romped away with
the market. On the one
hand, a modest
acquisition (along the
lines of Fujitsu’s
acquisition of Impact
Plus) will not give them
the scale they seek. If
acquisition of European
or US firms is to become
a feature of the next 18
months then we will need
to see some very
targeted and intensive
acquisition plans, and
I’m not sure if even
today’s burgeoning
market can supply them
with enough targets.
So where does this
leave Xansa and Steria?
Boringly sane, in my
opinion, apart from the
mild flurry of
excitement caused by
City sentiment that
Xansa has been
overvalued. There seems
to be a good fit between
the firms, taking
Xansa’s outsourcing
resources and domain
expertise to a new
audience in Europe.
Xansa has some good
stories to tell in, for
example health and
financial services,
which should find a
willing audience in | |
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| | Europe. The nearest
comparison I can think
of is the merger which
created LogicaCMG, which
went with tedious
smoothness, at least
from the point of view
of commentators who like
a bit of blood on the
market.
One thing the move
does is create a new
European top ten player,
and potentially revise
the “East-West” polarity
suggested in the opening
paragraph. Should we
perhaps be looking at a
three-way model of the
new global consulting
market, with Europe,
India/China and the US
as the three corners?
In this model, certain
movements seem easier
than others: European
firms, for example, have
found it harder to cross
the Atlantic than their
American equivalents.
Should Indian firms,
then, be looking to
America rather than
Europe for their next
growth phase? Until the
next round of rumours,
we’ll just have to wait
and see.
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