Eat or be eaten. That's the new mantra for Europe's info-tech services companies. The Continent is home to thousands of such businesses, ranging from mom-and-pop outfits that look after PCs and networks for local real estate agents or dental offices, up to globe-straddling giants like Paris-based Capgemini that score multibillion-dollar outsourcing contracts to run systems for corporations and government agencies. All told, these IT services players are vying for an enormous market, pegged by researcher Gartner Inc. (IT ) at $212 billion this year in Europe alone and more than $636 billion worldwide.
Sounds juicy, but Europe's IT services companies are feeling a brutal squeeze. Tough competition is pulling down prices and thinning margins: Gartner figures European industry revenues will grow by just 3.5% this year. At the same time, clients are becoming more global, which requires their IT service providers to move beyond familiar national markets and add operations around the world. The twin pressures are prompting a wave of consolidation. "Given the limited upside in growth, we think there are all the ingredients for merger and acquisition activity to kick off in 2005," says Merrill Lynch & Co. (MER ) in an Apr. 13 report.Some of that activity began last year. Paris-based Atos Origin bought SchlumbergerSema (SLB ) for $1.48 billion to beef up its presence in Britain and the Netherlands.
Amsterdam-based Getronics snapped up rival Dutch firm PinkRoccade for $434 million. Many companies have struck deals to acquire the IT departments of corporate clients as part of long-term outsourcing contracts. IBM (IBM ) bought the IT group of Danish shipping and logistics giant Maersk, as well as a smaller Danish firm, for $575 million, while Siemens Business Services gobbled up BBC Technology
Ltd., the broadcaster's IT group, as part of a 10-year, $3.7 billion deal.
Behind the urge to merge are two trends reshaping IT services. First, computer systems are becoming cheaper and more cookie-cutter, so the work of setting up and maintaining PCs, networks, and packaged software is becoming simpler and less lucrative. Coupled with the rise of the Internet, that's driving routine care to remote centers in inexpensive locales such as India and Eastern Europe. At the same time, IT services are becoming more "industrialized." Where once software applications were custom-developed for each client, now fast-rising Indian companies such as Wipro (WIT ), Infosys Technologies (INFY ), and Tata Consultancy Services can churn out software that may be 90% standard and only 10% customized -- all for a fraction of the cost of bespoke programs.
With their Old Guard businesses under such attack, European IT services providers are looking for new models. They're putting more emphasis on business-process outsourcing, the fastest-growing part of the market, where companies spin off functions such as customer service or even accounting to outsiders. Some, like Finland's TietoEnator, are focusing on certain vertical markets while gingerly expanding their global presence. TietoEnator specializes in telecom, banking, paper, and health care, and though it has staff in 25
countries, it's strongest in the Nordic region.
