BEWARE THE DOG EAT DOG
Most also agree that one big deal – perhaps the acquisition by Telkom of an IT services group or the privatisation of state IT company Arivia.kom – could be the trigger that sets off this wave of consolidation in an industry worth almost R20bn/year.
There has already been some M&A activity – Faritec bought Enterprise Connection, for example – but the bigger deals have still to materialise.
"There are just too many players in this space," says Business Connexion (BCX) deputy CEO Benjamin Mophatlane. This, coupled with convergence between IT and telecommunications, will drive the consolidation, Mophatlane believes. His colleague, BCX outsourcing group executive Mike Sewell, adds: "The market is extremely competitive. It’s dog-eat-dog out there."
Consolidation is inevitable, says GijimaAST CEO John Miller. "It’s overtraded. There are lots of smaller companies bidding for business at prices at which they cannot [afford to] deliver. They are muddying the water."
There are too many companies chasing too few contracts, he says. As a result, it’s a "buyers’ market". These buyers – themselves under pressure to become more efficient in a low-inflation environment – are exerting enormous pressure on their IT suppliers to cut costs. In the past, services companies such as GijimaAST and BCX enjoyed annual escalations in the value of annuity contracts. Now, they are often expected to cut costs every year instead.
The phenomenon is a global one, but Miller feels it’s more acute in SA than it is, for example, in the UK.
Internationally, speculation is rife that Hewlett-Packard plans to make a sizeable acquisition in the services market. Talk is that it might make an offer to buy US services giant Computer Sciences Corp. There’s also speculation that T-Systems of Germany might make a bid for Siemens’ struggling services arm, Siemens Business Services (SBS).
Though some multinational services companies are finding the going in SA tough – EDS, Unisys and SBS come to mind – others, such as IBM, are ramping up their investments here, despite the competitive environment.
IBM SA is investing hundreds of millions of rand in an "integrated delivery centre" in Sandton to serve IBM clients in the UK, Sweden, Denmark, Finland, Norway, Belgium and the Netherlands.
IBM SA’s plans aren’t limited to supporting offshore clients. It wants to take on the services heavyweights at their own game. "We have chosen outsourcing as the area where we need to have a significant presence and become a market leader," says IBM SA Global Services GM Mteto Nyati.
This will no doubt add to the margin pressures already in the market. It’s difficult to predict, though, how consolidation might happen.
GijimaAST, a turnaround story after a number of years of bloodletting, is one company that could become a target. But Miller says GijimaAST’s shareholders would be "crazy" to entertain the option of selling the business now. "We need another 18 months to unlock the value here," he says.
BCX, which held inconclusive talks about a deal with Telkom last year, is also on the prowl. "We have money in the bank and we have an active radar screen," says Sewell. "When we find something, we will move."
It’s also possible that Telkom will still make a play for BCX. Talks broke down after the two parties couldn’t agree on a fair offer price. Mophatlane says there are no talks taking place at present.
"If Telkom can find a suitable local player, it will certainly change the dynamics of the market," says Gert Schoonbee, GM for strategy and business development at T-Systems SA. Schoonbee also thinks mid tier services players, such as EOH, will have to look at making acquisitions to build up bulk to fend off the bigger players.
Another company that could be put up for sale soon is Arivia.kom. Transnet and Eskom Enterprises recently exercised their pre-emptive rights – presumably under instruction from public enterprises minister Alec Erwin – to acquire Denel’s 23% stake in Arivia. Eskom now holds 58% of Arivia and Transnet 42%. Transnet, though, has previously expressed its desire to sell its interest in the company. Eskom is noncommittal.
Erwin is expected to announce government’s plans for Arivia in the next few months. Industry players think its privatisation is a possibility as there’s no benefit in government holding on to it.
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