Having recently got the plaudits for renewing its flagship Lloyds of London IT/BPS contract (see Xchanging renews Lloyds BPS deal), Xchanging has now made a curious move to bolster its activities in the loss-making Italian market.
Xchanging is acquiring Milan-based securities and asset management software and services provider AR Enterprise S.r.l. (AR) for up to €28.55m in cash. And it has also taken full ownership of Italian enterprise partnership (EP) Kedrios via a €12.85m recapitalisation of the business, which reduced partner SIA S.p.A. (SIA)’s holding to 1.3% from 49%.
Kedrios and AR made revenue of €12.5m and €14.9m respectively in FY11. So Xchanging will now own an Italian financial services BPS business with combined revenues just shy of €30m. CE Ken Lever said acquiring AR would ‘resolve the weak strategic position of Kedrios and create a strong combined business with scale and strong profitability’. Xchanging expects the acquisition to be earnings accretive, on an adjusted basis, from 2013 onwards.
Certainly, AR is profitable. It made a pre-tax profit of €3.3m (22% margin) for the year ended 31 December 2011. However Kedrios made a loss of €3.9m in FY11, on more or less flat revenues. So without significant cost cutting the combined business will still be loss-making.
We’re just not sure why Xchanging is putting so much time, energy and investment into propping up the Italian business. It became clear in March that Xchanging was going to hold onto Kedrios (see here), even though Lever has disposed of Xchanging’s other loss-making operations like its troubled US workers’ compensation claims business (see Xchanging exchanges US business for cash).
Lever clearly sees the opportunity in Italy around driving cost synergies and cross-selling and up-selling services between the Kedrios and AR businesses. But the risks are high. Without careful planning, integration and management attention the deal could leave Xchanging saddled with an even bigger headache in Italy than before.
We’d like to see Xchanging sticking to its knitting in clearly defined markets where it knows the ropes inside out – like the Lloyds of London insurance market. Financial services in Italy seems worlds away.