Share price falls fuel Aussie IT buyouts?

Share price falls fuel Aussie IT buyouts?

Summary: Huge share price falls amidst some of Australia's largest IT companies over the past few weeks have fuelled speculation about whether the industry could be about to face some degree of merger and acquisition activity.

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Huge share price falls amidst some of Australia's largest IT companies over the past few weeks have fuelled speculation about whether the industry could be about to face some degree of merger and acquisition activity.

Major listed local companies such as SMS Management & Technology, Oakton, ASG and UXC, which hold major IT services contracts with government departments and large companies such as Qantas, have all seen large slumps in their share prices in recent times due to the global financial crisis, although most made a modest recovery today.

Share prices: Australian IT companies bottom out
(Credit: Renai LeMay/ZDNet.com.au)

Internationally, technology giants such as Symantec and Oracle have taken advantage of the turmoil to pick up smaller firms for potentially lower prices than they would have previously paid.

UXC finance director Mark Hubbard said he didn't think there was more or less opportunity for consolidation amongst local firms because most had seen similar share price declines. "The relativities between the shares have remained constant, but everybody's value has gone down," he said.

On the other hand, two possibilities Hubbard mentioned were that multinationals could be interested in buying local firms, or that private equity giants could step in. UXC itself could be hard to take over, as the company has a controlling block of shareholders including the board, management and staff that held 35 per cent of the firm.

"Would we want to sell the company at these prices ... speaking for myself, I'm not happy with the price," he said.

IT services giants Fujitsu and CSC are known to have taken a look at Telstra's Kaz IT services division when the telco recently had it on the market, although no acquisition resulted. And Hewlett-Packard has also been on the acquisition trail, picking up EDS in one of the IT industry's biggest ever buys.

Optus has in the past been an acquirer, picking up Alphawest and Uecomm locally. Private equity has been active in the Australian IT sector to some extent over the past couple of years, with US company Francisco Partners picking up Mincom and investing in Melbourne-based Aconex, for example. MYOB was also temporarily a target.

ASG chief financial officer Dean Langenback said he agreed the financial changes could spark local consolidation on the horizon but said it was unlikely ASG would be too involved as a target, because of what he described as the Perth-based company's differing nature as an IT outsourcer, compared to others in the sector.

Microequities head of research Carlos Gil, who tracks a number of local technology firms including DWS, said there had to be a strong reason for consolidation to take place amongst local firms, with the most compelling one being the need to cut costs in a bad climate.

He pointed out any local acquisitions would be very hard to finance through debt, because of the bad financial situation, although it could be easier if companies had cash sitting around.

Gil agreed larger companies could be looking to snap up minnows for currently lower prices; however, he said he thought it was too early to know what the fallout would be in terms of mergers and acquisitions. "I think there is going to be a lot of people holding back," he said.

The analyst said overall, while it was too early to say how the financial crisis would impact demand for IT services, in general his firm expected a "negative outflow" from the situation. "We do expect IT discretionary spending to decline," he said.

Topics: Telcos, Banking, Outsourcing, Telstra, Tech Industry

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