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
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
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
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
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
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
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
This merger will therefore not be referred to the Competition Commission
under section 33(1) of the Act.