Dominique Raviart
Steria to acquire Xansa
French IT services player Steria is offering £472m in cash for UK-based application services and F&A BPO provider Xansa. Xansa had (to end of April) revenues of £380m and an operating margin of 5.6% in FY07. In 2006, Steria had sales of £850m (€1.2bn) and a 7.1% operating margin. The new entity will have revenues of £1,230m (€1.83bn).Comment: The acquisition of Xansa will strengthen Steria's presence in the UK. Despite €290m in 2006 UK revenues, Steria has largely been an infrastructure management player working for local government. Xansa is well-known in the UK for its work in application services and F&A BPO with the largest firms in the private sector, largely with banks, retail and utilities. Thanks to Xansa, Steria will therefore greatly improve its services range, and will jump from a ranking of 38 to a ranking of 15 among the largest S/ITS providers in the UK, with £580m in sales, after Siemens and right before Tata Consultancy Services.We think the timing of the operation is right. Xansa has a well-established offshore presence, and it now has a successful delivery model that blends onshore and offshore capability for its customers. The company has faced several years of flat growth and mid-digit operating margin. In FY07, the company proved its strategy had worked: its application services business had stable revenues, suggesting the company was now able to balance declining prices by contract extensions. Total revenues were up by 6.3%, driven by BPO growth (up by 30%) around F&A and, increasingly, payroll for the NHS (up by 56%). Despite its tremendous reinvention, Xansa still has to increase its exposure to solutions and consulting in order to move away from direct competition with the Indian vendors. Steria's traditional and growing focus on solutions may help here.Finally, one of the great benefits for Steria is the 5,000 Indian headcount that Xansa brings to the deal. Steria had already engaged in setting up a presence in India and the Build Operate Transfer contract was to be finalised this year. Xansa will therefore accelerate the growth of Steria in India to a point where the French company has more Indian presence than players such as Atos Origin, Fujitsu Services Europe or LogicaCMG. Steria now needs to demonstrate that it can avoid attrition in India and make its Continental European clients use Indian offshore.The acquisition of Xansa is not inexpensive with Steria offering a 60-70% premium over Xansa's stock. We will comment further after the analyst meetings about the acquisition and the H1 results that Steria has announced today.
