Tech biz: Breton is back !

2010 has been a big year for deals in the IT industry. Much of the action has been in the US, with big and costly acquisitions such as McAfee by Intel and 3PAR by HP (after a bidding war with Dell).

On December 14, it was Europe’s turn, in particular France and Germany. Atos Origin and Siemens announced an 850 million EUR deal for the sale of Siemens IT Solutions and Services (SIS) to Atos Origin. Presented as “a strategic partnership … to create a European IT champion”, the deal also involves a 15% stake for Siemens in Atos Origin and a 7 year outsourcing contract valued at 5,5 billion EUR.

Once the dust has settled, Duquesne Group will analyse in more detail the impact of the deal, but in this note we will give our first reactions. Overall, we feel that the acquisition is a sensible move for Siemens, a good deal for Atos Origin … and a personal triumph for Thierry Breton.

It is no secret that Siemens has been struggling for several years with the mounting losses at its SIS division and neither CEO Peter Loescher nor his two predecessors were able to fix the problems. Siemens has finally decided to put an end to the situation by disposal of the business.

As many industrial companies have learned, success in IT services is very difficult. Even IT product heavy weights such as HP – despite the acquisition of EDS - have had enormous difficulties. Folding SIS into a strong services company such as Atos Origin makes sense. Better to have 15% of a potential big winner than 100% of a company with problems.

The French based services company has acquired a company of almost its own size both overall and in the critical outsourcing arena, in a manner somewhat reminiscent of the Bourigeaud period.
When the deal is finalized later this year, the combined entity will be number 2 in outsourcing in Europe, behind IBM but ahead of HP-EDS and Cap Gemini. Scale is a key competitive factor in this business, in order to serve large multinationals.

While some observers might underscore the relatively weak presence outside of Europe, and especially in emerging markets, Thierry Breton is absolutely right when he says that being strong in the home market is vital for global success.

The price of 850 million EUR appears to be favorable for Atos Origin, as it represents less than a quarter of SIS revenue. A possible downside risk lies in the quality of SIS’s current contract portfolio, given the division’s big losses. Outsourcing can produce not only recurring profits but also recurring losses.

In terms of execution, Duquesne Group believes that Atos Origin has the expertise and the experience to achieve successful integration and synergies.

Thierry Breton cut his teeth in the IT industry as second in command to the visionary Chairman and CEO of Bull, Jean-Marie Descarpentries, who turned around and privatised the company in the 1990’s. Their vision of building a large European IT champion did not work out, although Bull has since become a well respected medium size player, especially in niche markets like High Performance Computing.

In a different context, this deal is an important step forward in the pursuit of the same objective – building an IT company in Europe that is able to compete successfully with the best.

The arrival of Siemens in the capital of Atos Origin also represents a move to the sort of balanced Board – combining industrial, financial, public and internal shareholders – favored by Descarpentries and Breton.

With this move, Thierry Breton also emerges as an unquestionably leading figure in the European IT industry.

Financially minded observers will undoubtedly begin to speculate about a possible acquisition at some point of the new company by an American giant, with rich rewards for top management.

On this point, we are skeptical. Thierry Breton has always been profoundly French and has become profoundly European. Money is important but so are ideals and vision. We believe that he would not accept a takeover by an American company and that he wants to be the boss of an independent European IT champion.

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