Big IT services sharks circling for prey

The trend of consolidation among European IT services firms is only going to continue, according to a recent report from market researcher IDC.

Expect to see more deals like the recent purchases of Denmark's Maersk Data and DMdata by IBM and the UK's Synstar by HP.

IDC analyst Khalid Irshad told silicon.com: "We've got very mature markets in countries such as Germany and France. There are simply too many companies and not enough opportunities."

Along with France and Germany - both overcrowded services markets with increasing pricing pressure - the UK and Nordic region are ripe for consolidation. The big players are dominating and pushing out the smaller players, Irshad said.

This means to survive second-tier firms - which aren't faring well in this cutthroat market which is also experiencing the pains of economic recession - must merge with similar-sized or smaller businesses to compete against the big guys or allow themselves to be bought by a larger firm. Another factor leading to consolidation in the near future, said Irshad, is when companies aren't doing well their price tag "goes through the floor".

Names often heard as potential targets include UK-based Xansa and Germany's T-Systems, whose parent company Deutsche Telekom could be eager to sell all or part of the company to offset its sizable debt, according to Irshad.

The big US-based players - IBM, EDS, HP, CSC - are the most likely buyers, along with major Indian offshoring firms such as Tata Consulting Services, according to Irshad. With valuations low, the time is right for major firms looking to expand their dominance to buy smaller businesses.

BT Global Services is an example, along with Siemens Business Services and T-Systems, of a firm strong in its local market that could use acquisitions to expand internationally. Irshad said: "BT GS needs to grow [internationally] in order to... reduce reliance for revenue on its core market."

One future trend, according to IDC, will be more IT services firms acquiring business process outsourcing (BPO) providers to widen their offerings, like when IBM bought PriceWaterhouseCooper's consulting division.

The reason for these sorts of deals, Irshad said, is "[BPO] is a high margin business, and it's all about margins now."

The report, titled European Services Industry a Hotbed for Consolidation, is available from the IDC website.