OFT closed case: Anticipated acquisition by Vertex Data Science Limited of Marlborough Stirling plc.
Affected market: Outsourced back office business solutions
The OFT’s decision on reference under section 33 given on 13 May 2005. Full text of decision published 1 June.
Vertex Data Science Limited (Vertex) is a wholly-owned subsidiary of United Utilities plc. Vertex is an international provider of outsourced back office business solutions, including customer management (contact centres and billing), finance and accounting and human resources solutions, to the utility, local and central Government, retail, telecommunications and travel sectors. For the year ended 31 March 2004, Vertex's UK turnover was approximately £370 million.
Marlborough Sterling plc (MS) is a provider of outsourced back office (transaction-based) services to the UK financial services sector. MS also provides related technology and software to the financial services sector. MS has three divisions: the Life and Pensions Division which provides outsourced back office administration (e.g. policy processing, customer accounting, underwriting and claims risk management, management accounting, financial accounting, regulatory compliance and actuarial services) for life and pensions companies; the Exchange Division which provides an on-line portal service delivering comparative quotations from life and pensions companies to independent financial advisers; and the Mortgage Division which MS operates under a joint venture with egg plc managing mortgage customer accounts on behalf of mortgage companies. For the year ended 31 December 2004, Marlborough Sterling Group's turnover was £98.8 million.
Vertex’s proposal takes the form of a recommended public offering for the whole of the issued and to be issued share capital of MS other than MS shares already owned by United Utilities. The transaction will be effected by means of a scheme of arrangement subject to court and MS shareholder approval. The consideration payable under the proposal is approximately £72.2 million.
The parties submitted a merger notice on 14 April 2005 and the 20-working day statutory deadline expires on 13 May 2005.
As a result of this transaction Vertex and MS will cease to be distinct. The UK turnover of MS 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.
The parties overlap in the provision of outsourced back office solutions delivered through proprietary software platforms.
Although the parties overlap in the provision of back office outsourcing solutions they operate in different industry segments. MS provides such services to the financial services sector whereas Vertex is active in the utilities, local and central government, retail, telecommunications and travel sectors.
The parties submit that there is no demand side substitution between the different types of outsourcing. This was confirmed by third parties contacted by the OFT.
On supply side substitution the parties submit that in order to gain a foothold into a particular industry sector, a significant amount of investment is required. Vertex estimates that in order to gain a 2 per cent share of supply in the life and pensions sector, investment in the region of £40-50 million would be required. This would cover the cost of building a new software platform to deliver services or to buy an existing client platform.
Vertex contends that in the last three years it has unsuccessfully tried to enter the life and pensions outsourcing sector. One of the main reasons cited by Vertex as underlying its failure to enter is that its bids were premised on building a new software platform whereas other competitors in this segment were offering established and proven platforms. This is generally supported by third parties who confirm that they would not consider outsourcing to a non-specialist as an option. Those third parties who would consider this option generally attach stringent conditions eg retaining specific product expertise, strict governance practices and proven financial record of the service provider.
Given the high cost of gaining entry into a particular industry segment and customers' general requirement that the outsourcing service provider must have industry expertise, the information available suggests little prospect of supply side substitution.
In conclusion, evidence from third party customers and Vertex's lack of success in entering the life and pensions sector would suggest that narrow frames of reference delineated by various industry segments would be appropriate. However, given that the OFT concludes that no competition concerns arise on any definition (see below), it is not necessary to reach a firm conclusion on the relevant product frame of reference.
The parties contend that the geographic scope is at least national. Given that no competition concerns arise on any definition, it is likewise unnecessary to reach a firm conclusion on this issue.
The parties overlap in the provision of back office outsourcing solutions. To the extent that general business process outsourcing in the UK encompassing all sectors were taken as the relevant frame of reference (contrary to certain indications discussed above), this is a large sector with numerous suppliers and the parties’ combined share of supply by volume or value is small (the parties submit significantly less than 10 per cent). Furthermore, if in-house provision were to be taken into account the parties’ combined share of supply would be even less.
If a narrow product frame of reference is taken ie back office outsourcing solutions in particular industry segments, the parties submit that there is no overlap as each party specialises in different industry segments. In this regard third party responses do not indicate any occasion in which MS has bid against Vertex. Furthermore, the main rationale for Vertex acquiring MS is that while the life and pensions and mortgages outsourcing is growing, Vertex would find it difficult to enter this particular industry segment. This would imply that pre-merger there is little actual or potential competition between the parties.
Barriers to entry and expansion
Third party comments indicate that new entry may be difficult as customers expect a certain level of expertise and economies of scale before awarding outsourcing contracts. However, demand for life and pensions and mortgage outsourcing is a growth area and many IT companies are seeking to enter this segment. Given that there are no competition concerns about this transaction, it is not necessary to conclude on barriers to entry.
Given that there are no concerns about this transaction no conclusions are drawn on buyer power.
The OFT has found no evidence that this transaction raises any vertical competition concerns.
THIRD PARTY VIEWS
No third party expressed any concern about this transaction.
This transaction does not appear to raise significant concerns on any reasonable frame of reference. The parties' combined share of supply of total back office outsourcing, encompassing all industry sectors, is small. At the level of individual industry segments, the evidence available to the OFT suggests that the parties do not overlap. There also appears to have been no occasion in which MS has bid against Vertex. This suggests that there is little actual or potential competition between the parties. 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 UK.
This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.