IT Services Companies…time to be wooed?

November 1, 2009Blog Standard

The IT world has seen a heightened level of interest in the services busienss in the past 18 months.

HP acquires EDS for $13.9 Bn in May’08 at a premium of 32.5% over the closing stock price.
Dell acquires Perot Systems for $3.9 Bn on 21st Sept 2009. at a premium of 68%
A wek later, on 28th Sept, Xerox acquires ACS for $6.4 bn. at a premium of 33%

For years the IT services companies were seen as the poor cousins of technology companies who built technology products both in hardware and software. Companies like IBM, HP, Sun, Dell, Microsoft, Oracle, SAP stole all the limelight and all the attention, and had the best of margins, especially the software companies.

IT Services companies, some of whom had started as early as 50s (CSC) and 60s (EDS) were seen as the backroom “operations” people who attended to the nuts and bolts and plumbing and engaged in what was perceived as low end, low margin business.

Although IBM was the first technology company to give a strong focus to services in 90s in the post Gerstner era, the other technology vendors did not see it necessary to copy IBM’s strategy, untill last year.

What exactly does this recent interest in services business signify and what does it portend for future?

1) Watch out for more acquisitions of services companies by product companies

As the global economy moves from growth phase to recession to a possible but slow recovery, hardware product businesses are no longer assured of steady revenues and healthy margins it enjoyed from fulfilling the natural demand which came out of growth till a year back.
Services can provide a healthy succour in a revenue stream which is additional, recurring and predictable unlike sale from hardware products which is one time.

As every product company hastens to strengthen this revenue stream, we will see an increased interest in acquisition of pure play services companies by companies who get majority of their revenues today from sales of products.

The other large scale product companies thugh not necessarily server companies are Acer, CISCO, EMC.

It won’t be a surprise if these companies announce acquisitions of services companies. These acquisitions may not necessarily be multi billlion dollar acquisitions but acquisitions of some scale of niche services companies is a very high possibility.

2) Software Companies will climb on the bandwagon too…

Software product companies have significantly higher revenues from sale of software licenses and recurring license maintenance. Enterprise customers, with everyone under pressure to reduce costs, are less and less willing to keep shelling out huge costs for software license maintenance and will look at options to avoid this. Success of third party maintenance companies like Rimini Street is a clear indicator of this trend. More companies will copy Rimini’ business model and very soon software product companies will join the HPs, Dells, and Xeroxes of world to acquire services companies.

3) All this activity is more good news than bad news for pure play services vendors

Companies like Accenture, Cap Gemini, TCS, Wipro, Infosys, Logica, Atos are set to gain as the neutrality of independent services companies with no axe to grind in terms of a techology platform will be seen as a big positive by enterprise customers.

It will be hard for the services arms of IBM, HP, and EDS to avoid the customer perception that they will push the technology platforms of the parent companies

4) Good opportunity for smaller services companies who are in trouble..

Services companies who are not doing well, and there are several of them, will try to benefit from this recent interest to hasten their merger strategies and will rush to find an appropriate suiter who will buy them and bail them out of their troubles.

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