Competition Commission rules against Capita-IBS merger

(By Anthony Miller – Wednesday, 1st April 2009 8:15am). Not the sort of April Fool’s day ‘surprise’ that Capita was looking for, but the Competition Commission (CC) has provisionally ruled that Capita’s acquisition of local government software supplier IBS OPENSystems last June (see Capita to buy IBS) is potentially anti-competitive in the market for revenues & benefits (R&B) software. According to the CC’s findings (see here), “Following Capita’s acquisition of IBS, the only other supplier actively bidding for new contracts was Northgate Information Solutions and only Capita, Northgate and Civica had existing contracts with customers.” The CC also said that Civica told them it will not pursue expansion in the R&B market “for the next two to three years while it was in the process of moving its existing customers on to the new version of its R&B software system.” The CC is looking at potential remedies including full or partial divestiture, believing that “behavioural remedies” such as price control (!) would be unlikely to be effective. Comments on the CC’s findings need to be in by 27th April. Capita “will continue to make its case” in the continuing inquiry.

This is a bit of a blow for Capita, as it is the first time it has had an acquisition referred to the CC. It paid £78m to buy IBS, which at the time had revenues of around £21m and (according to the CC) around 10-20% of the R&B market, compared to Capita’s 20-40%. Local government is a growing market for Capita – last year it derived 20% of its revenues from the sector, compared to 17% in 2007 – and R&B is a rich source of software and, more importantly, BPO opportunity. In the end, if Capita has to ditch IBS it will be more of an inconvenience than a disaster. Clearly, any new owner of IBS will have some hard thinking to do whether to try to fight Capita (and Northgate) on its own turf or look for a ('non-cartel'!) partnership. Perhaps other UK-based BPO players will take a look at IBS, such as Vertex (already in local government). Mouchel (likewise) or Xchanging (mostly private sector but sniffing around public). If it wasn’t for the fact that it is in such dire straits, maybe even Liberata could have been in the frame. I don’t doubt the major India-based SIs would love to get more business from the UK public sector, but it’s just the wrong time for the Government to be overtly seen to be 'shipping British jobs offshore'. Frankly, we thought the Capita/IBS deal made good sense all round, but it’s good to see that the watchful eye of the CC is there to make sure that there’s fair play.