Datacraft deal heats up the high end

Datacraft deal heats up the high end

On October 6, 2010, IT Solutions company Datacraft New Zealand announced that it has placed a conditional offer to acquire 100 percent of privately and locally owned service provider (SP) Integral Axon.

While the value of the deal is undisclosed, IDC estimates the deal value to be in the range of NZ$40-45 million excluding asset and debts. Datacraft expects to complete the deal by 1st November 2010. Datacraft is a subsidiary of Dimension Data, a multinational IT solutions and service company. Datacraft earned local annual revenues of NZ$55 million in FY2009 whilst Dimension Data global revenues were US$4 billion in FY2009.

A key facet of this deal is that both parties have either been recently acquired or are under intentional purchase agreements.

In May 2010, Axon (NZ$100 million annual revenues) was acquired by the somewhat smaller Integral Group (NZ$50 million annual revenues) to create a company with revenues estimated at NZ$150 million. The majority of revenues from both providers come from the product and procurement business, with IT services representing a little over a third of the stated revenues. The anticipated focus for the newly integrated business would be on outsourcing and other professional services.

Subsequently, in July 2010, NTT Communications', Japan's largest SP, announced that it had agreed in principle to purchase Datacraft’s parent company Dimension Data, a South African- based IT SP and product reseller, for US$3.2 billion.

These very closely timed acquisition deals raise more questions than immediate answers. 1) What was the motivation for the shareholders of Integral Axon to sell so quickly after the Axon acquisition in May 2010? 2) Is it the final curtain on the Axon brand name which is so strong in the New Zealand market? 3) How will this new announcement play out in the eyes of current clients, prospects and staff? 4) What will be the role of NTT once the acquisition of Dimension Data is completed? 5) Do the service offerings of each of the individual vendor’s compliment the new entity? 6) What will be the impact on cultural integration within the new entity? and 7) What are the growth opportunities for the new entity in the New Zealand market?

Future outlook

This deal represents another step in the consolidation of New Zealand's IT services market as providers see greater opportunity to expand on skill set and scale. The acquisition of Integral Axon propels Datacraft into the high-end of the Tier 2 players. IDC estimates the new entity will have a market share of close to 2.5 percent in IT services and overall company headcount of close to 580 employees, just surpassing Fujitsu.

IDC believes it will potentially take several years, to complete the full integration, especially if and when NTT comes on board. However over time, given the global scale of the parent company, the newly aggregated business may potentially shift into becoming a Tier 1 competitor.

IDC believes the primary interest for Datacraft has been Axon, and it may have been in discussion prior to its acquisition by Integral. IDC believes Integral will have been aware of the talks between Datacraft and Axon prior to its acquisition, however, Integral's shareholders may have seen a great opportunity for the Integral Axon formation, both from a financial perspective as well as the creation of a stronger and bigger IT services provider in the New Zealand market. While it is not clear as to the initial deal value, and whether shareholders had to borrow money to finance the deal, Perpetual Trust Limited (100 percent owned by NZX listed Pyne Gould Corporation Limited) backed Integral’s management team. This latest acquisition could potentially be a quick return on investment for Perpetual Trust Limited. It also mitigates the risk of the Integral Axon merger, given the size and scale of the Axon takeover by the much smaller Integral business.

The real synergy with the acquisition for Datacraft is its ability to leverage the skill set capabilities around managed infrastructure services from Integral Axon, and to be a key converged infrastructure player to address the demands in cloud computing. Integral Axon's IP has been largely around IT infrastructure, application development, managed services and outsourcing - all areas in which Datacraft has had little or no presence. Datacraft's strength has been primarily in network consulting and integration (NCIS).

At the end of the day, having strength in network integration needs to be coupled with the rest of the stack. The combined expertise will result in Integral Axon bringing in the infrastructure (servers and storage) capabilities and Datacraft the network skill sets, creating a more end-to-end solution for its customers. As a result of the acquisition Datacraft have also gained access to a Tier III datacentre on the North Shore.

The deal will also provide Datacraft with a greater customer base in Auckland, Hamilton and Christchurch, as it already has strong coverage in Wellington. However, while Integral Axon primary focus was on growing the mid-market <500+ employees, Datacraft has largely serviced the larger corporate and government departments. The key will be in maintaining realistic price boundaries that meet the requirements of Integral Axon's mid-market strategy, as well as delivering at enterprise level.

It does mean curtains will be drawn on the Axon brand name, as all three brands, Datacraft, Integral and Axon will be absorbed into the Dimension Data brand. It is not yet clear as to when this will take place. The Integral Axon operation has not fully recuperated from the earlier acquisition and has to now deal with forming a new identity with Datacraft that is in line with the overall company vision and motto of an Internationally owned company.

Overall IDC believes this deal is favourable for Datacraft, which has been challenged in gaining the breadth of service capabilities and customer base to become a significant player in the IT services space in New Zealand. For the overall IT services market in New Zealand it means more competition in the high-end of the market, but less vendors to service the lower-end. The gap is becoming greater, and while Integral Axon were clearly in a strong position to further build the mid-market strategy, the new entity will need to prioritise its focus, which IDC believes will be the larger corporate and government sector. This also opens the gap for some of the smaller Tier 2 SPs to take a bigger stake in this lucrative mid-market.

Rasika Versleijen-Pradhan is a senior analyst for IDC's Business Enablement: IT Services research programme.

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