A late rush of merger and acquisition activity in the European IT services sector in 2010 could be an indication of things to come.
In December French IT services firm Atos Origin took over the IT services arm of German supplier Seimens (SIS) for €850m. Also, fellow French supplier Capgemini, which is Europe's biggest, took over German service provider CS Consulting.
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More of the same could be on the cards as European players attempt to fight off competition from the US and India while US and Indian suppliers try to grow their European businesses.
In September Rheinhard Clemens, CEO of IT services company T-Systems, told Computer Weekly that mergers and acquisitions were vital if European service providers are to compete with US giants.
IBM and HP have a huge chunk of European business and as IT services continue to commoditise their scale will put them in a stronger position.
There is also an argument that European players have to grow to hold off the increasing competition coming from India.
According to Gartner in the year 2008 to 2009 Indian players made the biggest gains in the European customer base. For example, Cognizant grew 41.7% and HCL 27.2%. This compares to Capgemini, which reported a fall in revenues of 4% and Atos Origin's 3.6% revenue drop.
European businesses are increasingly likely to use Indian suppliers. According to the latest research from sourcing consultancy Equaterra three Indian suppliers received the best ratings from UK customers.
Wipro, Mahindra Satyam and Cognizant were named the best suppliers to European customers in terms of general customer satisfaction after 220 UK businesses were questioned.
Sam Kingston, UK head at T-Systems, says Atos Origin and SIS now have a platform to take on bigger competitors. He believes other companies will use M&A activity to compete in Europe. "I think we will see more of this in 2011."
Robert Morgan, director at outsourcing broker Burnt-Oak Partners agrees. He says Europe's biggest service provider, Capgemini, could be a target.
"We could see Capgemini either split up into managed services and applications/consulting or an outright sale."
He says the applications and consulting business could go to a company like Accenture and managed services might be attractive to one of the big Indian companies.
Any outright sale could be a target of a big US player, he says.
Mark Lewis, head of outsourcing at law firm Berwin Leighton Paisner expects "significant consolidation in the IT and BPO sector in Europe."
He says the next couple of years will be tough for European service providers and as a result their valuations might reduce and they will become acquisition targets. "I think there will be acquisitions made in continental Europe by Indian players."
The combination of the low valuations of European suppliers and the European growth strategies of the Indian suppliers could create the perfect storm for consolidation. "The Indian companies will look for bargains and acquisitions that fit with their strategies," says Lewis.
Wave of partnerships
But it might not be acquisitions that change the supplier landscape, but a burst of partnerships could arrive on the scene, according to Lee Ayling, managing director at Equaterra.
"Sometimes it is not about acquisitions and I think we will start to see interesting partnerships signed."
He describes a recent deal between Indian supplier Patni and UK service provider 2e2 as an example of things to come. 2e2 customers will now have an offshore option under a five-year £20m contract with Patni. 2e2's internal users and some customers will receive services including application support and internal IT helpdesk services from Patni.
Ayling also believes some of the big mobile telcos will partner with local service providers.
A combination of factors moulded by the recession look set to shake up the IT services sector in Europe. Consolidation is inevitable, but the form that it will take is less certain.