Affected market: IT services
Please note that square brackets indicate text or figures which have been deleted or replaced with a range at the request of the parties and third parties for reasons of commercial confidentiality.
The OFT's decision on reference under section 33(1) given on 19 September 2007. Full text of decision published 26 September 2007.
Groupe Steria SCA (Steria) is a French information technology, consulting, outsourcing and professional services company listed on the Euronext Paris Eurolist. Steria operates in the UK through its wholly owned subsidiary Steria Limited as a provider of managed IT infrastructure and systems development services.
Xansa plc (Xansa) is a UK based outsourcing and technology company listed on the London Stock Exchange. As a provider of IT services, Xansa's activity essentially consists in providing transformation, application management and system development services as well as business process outsourcing services (back office services for clients' finance and human resources functions). In the financial year ending 30 April 2007, Xansa's UK turnover was £379 million.
Steria intends to acquire the entire issued share capital of Xansa.
The parties submitted a Merger Notice to the Office of Fair Trading (OFT) on 20 August 2007. The OFT's extended statutory deadline expires on 2 October 2007.
As a result of this transaction Steria and Xansa will cease to be distinct. The UK turnover of Xansa exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied.
The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.
FRAME OF REFERENCE
Steria and Xansa are both active in the provision of IT services, which they submit may comprise four segments:
- Software, within which three types of software activity can be identified: systems infrastructure, applications and information management software
- Support services, which include systems support, managed desktop services and business continuity/disaster recovery services
- Project services, which can be further divided into IT consulting, systems development and IT training
- Outsourcing, which encompasses infrastructure-led outsourcing, application-led outsourcing (application management), and business process outsourcing.
In the UK, Steria and Xansa are primarily active in the Project services and Outsourcing segments:
- Within Outsourcing: Steria operates infrastructure-led outsourcing under which it manages and operates IT infrastructure on behalf of its customers (provided services can range from basic services i.e. keeping the customer's server running and connected to the customer’s network, to complex design and build projects for customers’ specific requirements). Xansa is active in business process outsourcing, which primarily involves the provision of back office services for clients' finance and human resources functions.
- Within Project services: Steria is mainly involved in systems integration which is an aspect of the systems development activity. Xansa provides transformation, application management as well as systems development services.
The parties submit that systems development, which is an aspect of
Project services, is the only sub-segment where there is any real
From a demand side perspective, the parties submit that even though there are clear functional differences between the segments, there is no clear separation in terms of demand. The parties further submit that, in practice, IT services are inter-related and therefore are often bought as a package covering more than one segment; the content of each package depending on the complexity of the customer's needs and on its in-house resources.
From a supply side perspective, the parties submit that there is a wide variety of supplier business models and a high degree of supply-side substitutability. Moreover, they claim, given the highly technological nature of IT services, providers have strengths in different areas and at different times. Consequently, the parties believe that no clear and consistent dividing line can be drawn between the different segments.
Conclusion on the product scope
As this transaction raises no competition issues (nor attracted any adverse third party comments), the OFT does not consider it necessary to conclude on the product scope of the frame of reference. However for the purposes of analysis in this decision, the OFT used the segments submitted by the parties and adopting a cautious approach, considered any relevant sub-segments. The OFT has received no evidence to indicate this approach is incorrect.
The parties submit that the geographic frame of reference is at least national given that the majority of providers compete on a UK-wide or wider basis and that the services are often location flexible. The parties indicate also that there is a strong trend towards internationalisation of the IT services market such that an EEA or a wider geographic frame of reference may be appropriate.
Given that the transaction does not raise any competition concerns even on the narrower geographic scope, the OFT is not required to reach a conclusion on the geographic frame of reference.
The parties have provided data in relation to the overlapping segments, Project Services and Outsourcing, on the basis of their own estimates and those of a third party independent industry analyst, Ovum.
The data show that in relation to each segment the merged entity will not have a combined share of more than four per cent with an accordingly minimal increment. Moreover, data provided by the parties show that each segment is highly fragmented and that, on each of them, the merged entity will face numerous larger competitors post-merger, such as leading international technology companies (EDS, BT, IBM and Cap Gemini) and global consulting business companies (Accenture, Atos Origin and Deloitte).
The parties further submit that each is primarily active in different sub-segments within the identified overlapping segments, with the exception of systems development activity (an aspect of Project services). In the absence of data on competitors at this level, the parties have not been able to produce full market share data for systems development. However, on the basis of the total UK revenues attributable to systems development activity [see note 1], the parties submit that their combined market share in relation to this sub-segment is less than four per cent even if all their Project services revenue was to be attributed to their systems development activity.
The OFT has no evidence to indicate that the parties are close competitors pre-merger or that Xansa is the next best alternative to Steria in any of the identified segments or sub-segments.
Barriers to entry and expansion
The parties submit that barriers to entry are low given the rapid pace of technological development, the relative mobility of IT staff which is ready to move to new employers as well as the existence of various employment agencies which can provide available staff with a range of skills at short notice.
The parties also highlight that a majority of competitors in the provision of IT services have the size and skills to operate across all segments of the IT services market. For example, the parties refer to the growth of BT as a global IT services provider and the expansion into IT services of consultancy firms and IT hardware manufacturers such as Unisys, Hewlett-Packard and Fujitsu.
THIRD PARTY VIEWS
No third parties have expressed competition concerns about this transaction.
In the UK, Steria and Xansa are mainly active in the Outsourcing and Project services segments of IT services. Within these two segments, the parties focus on different areas, except in the systems development sub-segment. The parties' combined shares in the various identified segments and sub-segment are very low with a minimal increment. There is also no evidence available to the OFT to indicate that the parties are close competitors pre-merger. No competition concerns have been raised by third parties and post-merger, numerous large competitors will continue to provide a competitive constraint on the merged entity.
Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.
- [ ] (Estimate - Ovum 2006)