ComputerWire tracked 262 deals involving IT services vendors in 2004, compared to 191 in 2003, 117 in 2002, and 111 in 2001. The size of these deals has also increased: the top 20 M&As in 2004 had an average value of $550 million, compared to $504 million in 2003, $355 million in 2002, and $316 million in 2001.

Five of the 20 largest deals in 2004 involved investment groups acquiring struggling IT services divisions, with a view to turning them around and floating or selling them several years down the line.

EDS sold its product lifecycle management division to a consortium of three venture capital groups including Bain Capital, in order to boost its depleted cash reserves, and General Atlantic, the biggest investment player in the BPO space, acquired a majority 60% stake in GE’s Indian BPO operation.

Platinum Equity picked up two of the biggest computer resellers in the US (General Electric’s ITS division and CompuCom) for a combined $454 million. Both companies had been struggling to come to terms with declining PC prices, and Platinum aims to help both develop the services parts of their business.

The general recovery in demand for new IT services projects, coupled with the attractiveness of the offshore and BPO sectors, meant that services vendors are fetching increasingly high price tags. The 20 largest deals of 2004 had an average price/sales ratio of 1.2, ranging from Bain’s purchase of the software-focused PLM operation of EDS with a ratio of 2.29 and HP buying its Indian affiliate for almost 4 times sales, to Platinum Equity paying just 0.16 times sales to acquire ailing reseller CompuCom.

The most prolific vendors in terms of the value of its M&A activity last year were IBM Global Services and Hewlett-Packard, the latter of which spent a combined $1.1 billion on three acquisitions (Triaton, Global DigitalSoft, and Synstar) designed to make its outsourcing business a significant global force.

Business process outsourcing was a particularly fertile area for M&A activity.

Hewitt Associates claimed to become the largest player in the human resources outsourcing market following its takeover of HRO pioneer Exult for $691 million. In other big BPO deals, Singapore’s Scandent acquired Cambridge Integrated Services, the claims administration arm of Aon Corp for $175 million, and US outsourcing mover ACS Inc strengthened its position in healthcare BPO when it paid $94 million to buy the Patient Accounting Services Center.

IBM Global Services was the main player in BPO consolidation in 2004, as the company looked to drive growth in its services business through acquisition with growth in new contract signings stalling.

IBM acquired a foothold in the supply chain/procurement outsourcing market through French outfit KeyMRO to become a serious contendor in the insurance processing market through the takeover of Liberty Insurance Services, and gained a 6,000-strong call center and back-office support operation in India through the purchase of Daksh eServices for about $160 million.

Following the sale of its PC business to Lenovo in 2004, there is even more onus on IBM’s Global Services arm to drive the company’s growth, and further M&A activity is likely, particularly in relatively untapped geographies such as Germany, and new markets such as procurement outsourcing.

IBM’s purchase of Daksh, and HP’s purchase of the Digital GlobalSoft unit were two of the largest examples of Western services companies acquiring large offshore operations. India’s software services vendors are squeezing pricing in the services industry, which is forcing the likes of IBM and HP to source a larger percentage of their software and back-office skills from countries such as India.

Overall M&A activity shows little signs of slowing in 2005 following a strong start to the year. EDS building its HR outsourcing business through the $420 million takeover of Towers Perrin, and LogicaCMG acquiring a 60% stake in the IT services subsidiary of Portuguese energy giant Edinfor for $105.7 million. Meanwhile, Dutch IT services vendors Getronics and Ordina are involved in a bidding war over domestic rival Pink Roccade.