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December 16, 2004

Serco emerges as IT services force with $671 million double-takeover

Business services company Serco Group Plc has revealed itself as the mysterious suitor for IT outsourcing vendor ITnet Plc, by tabling a $456 million takeover offer.

By CBR Staff Writer

Birmingham, UK-based ITnet said in November that it was in talks with an unidentified buyer, and has now confirmed that it has agreed terms for a recommended cash offer of 320p per share, with a partial share alternative of 1.36 Serco shares for each ITnet Share.

Serco also announced that is has agreed to buy US government IT contractor RCI Holding Corp for $215 million in cash. RCI provides systems engineering, strategic consulting and HR focused business process management to the US Army and Navy, and made a pre-tax profit of $9.1 million on revenue of $256 million in 2003.

Serco, ITnet, and RCI made combined revenue of GBP1.9 billion ($3.7 billion) and pre-tax profit of GBP91 million ($177 million), with 70% of revenue in the UK and 12% in North America. Serco is funding the two takeovers, which will make it one of the 50 largest IT services contractors in the world, through bank debt.

Serco’s move to acquire two IT contractors is the latest example of how the lines between business support and IT services are becoming increasingly blurred, as clients look to work with the same vendors to manage non-core business functions, as well as the IT systems that underpin them.

Kevin Beeston, executive chairman at Serco, told ComputerWire: Technology plays such a big role in transforming business processes and the way operational efficiency is derived. Having a technology services capability is crucial to our business.

Serco’s activities range from IT services such as consulting and integration, through to facilities management, scientific support services, and traffic management consulting. Serco is the largest provider of training services to the UK aviation industry, and manages multimillion-dollar contracts to run railway franchises, prison services, and nuclear weapons research facilities.

Serco said the ITnet bid is designed to enable it to compete for larger and more profitable contracts in ITnet’s core UK local government market, and to also offer ITnet’s infrastructure management services to clients in sectors such as defense, health, justice, and transport, as well as overseas markets.

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The RCI deal boosts Serco’s presence in the US, and gives it a strong client base within the Department of Defense, which is the biggest single investor in IT worldwide. RCI is one of the 100 biggest IT suppliers to the DoD, and is particularly strong in providing consulting and administration services around human resources functions, which accounts for 37% of annual sales.

Serco expects both the ITnet and RCI deals to have a positive effect on its profitability in 2005, and said the ITnet purchase will generate cost savings of GBP5 million ($9.7 million) in 2007. Both deals are expected to be completed my mid-March 2005.

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