Capita has seen its acquisition of fellow public-sector software and services provider IBS OpenSystems referred to the Competition Commission by the Office of Fair Trading.
According to the Office of Fair Trading (OFT), the move was prompted by concerns that the takeover would leave only two significant players in the revenue and benefits software services market.
"With the removal of IBS as an important rival, Capita would be likely to find it profitable to offer its own and/or IBS's products and services at less favourable terms in future bidding opportunities," the OFT said.
Capita's acquisition of IBS was first announced in early June this year — with Capita offering 187.85 pence per IBS share, valuing the company at almost £78m — and was completed later that month.
Capita chief executive Paul Pindar said at the time that the buyout would provide Capita with "greater breadth and depth of expertise" and see IBS's network of local-authority and housing-association customers complement its own.
Earlier this year, the OFT approved the acquisition by Northgate Information Solutions — the only significant competitor of IBS and Capita — of Anite, further reducing the amount of suppliers in the market.
Simon Pritchard, OFT senior director of mergers, said the OFT approved the Anite acquisition on the grounds it was unlikely to reduce competition — unlike Capita's takeover of IBS.
"The fact that we have referred this case, but recently cleared the parallel Northgate-Anite merger, was not based on timing issues but based on the likely competitive effect of this merger, and the lack of significant effect of the other… The constraint that Capita and IBS have imposed on one another to date, when combined with the very low probability of new entry to the market, is key to why customers are concerned and why the OFT believes the Competition Commission should scrutinise this case and, if appropriate, impose remedies," Pritchard said in a statement.
Capita said it will "fully engage" with the Competition Commission review but a spokeswoman declined further comment.
Despite Capita on Friday announcing a deal with the Learning and Skills Council to take over management of the EMA grants system, Anthony Miller, managing partner of analyst TechMarketView, said the news of yesterday's decision will impact the vendor.
"This is obviously a blow for Capita; it's the first time they've had an acquisition referred to the Competition Commission, a process which can take up to six months," he said in a research note.