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January 15, 2006

IT services M&A activity accelerating after quiet 2005

The number of mergers and acquisitions in the IT services sector during 2005 was down 2% on the previous year, despite a late explosion of activity at the end of the year.

By CBR Staff Writer

ComputerWire tracked a total of 257 deals involving IT services vendors in 2005, compared to 262 in the previous year. The fourth quarter was the busiest, with some 70 deals announced during the period, and this momentum has continued into the first weeks of 2006.

The most striking feature of M&A activity last year were the deals that didn’t happen. Lockheed Martin and a consortium of investment firms aborted a $12bn approach for Computer Sciences Corp, the world’s fifth largest vendor, while Atos Origin was widely reported to be in ultimately fruitless merger talks with German players T-Systems and Siemens Business Services.

By far the biggest deal announced in 2005 was the purchase of SunGard Data Systems Inc for $11.3bn by a consortium of private investors, led by Silver Lake Partners and including Goldman Sachs Capital Partners and Kohlberg Kravis Roberts and Co.

However, this deal has been left out of our analysis of the 20 largest IT services M&As in 2005 because SunGard derives a large proportion of its revenue from its software operation, and the size of the deal is such that it would skew analysis of the data.

Leaving aside the SunGard deal, the biggest services M&A of 2005 came in December, when defense contractor General Dynamics Corp purchased federal IT services firm Anteon International Corp for $2.1bn in cash and $100m in debt assumption.

The top 20 acquisitions in 2005 had an average value of $538m, compared to an average of $550m in 2004 and $504m in 2003. In total, there were four deals worth over $1bn, all of which occurred in the second half of the year.

TietoEnator Corp, the largest indigenous player in the Nordic IT services market, continued to complete acquisitions at a phenomenal rate in 2005. Over the course of the year, the Espoo, Finland-based company carried out a total of 10 takeovers. The largest of these came in May when TietoEnator beat off competition from British rival Microgen Plc to acquire UK IT services company Attentiv Systems Group Plc for $99.8m.

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It is still early days, but it appears that 2006 is set to continue where 2005 left off. The first weeks of the new year have seen 19 deals completed in the IT services sector, a figure which is even more surprising because January is traditionally thought of as a quiet month. The majority of the deals announced so far have been relatively minor, with most of the significant movement occurring in the Nordic market.

For example, Swedish IT consultancy AcandoFrontec AB is set to pay approximately SEK 190m ($24.6m) for local rival Resco AB, while EDB Business Partner has further boosted its operation in Sweden with its SEK 180m ($23.3m) takeover of Datarutin AB.

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