Capita is to acquire rival Northgate Managed Services (NMS) for a knock-down price of £65m, less than half its £141.6m revenue, as it makes yet another attempt to build out its own IT services capabilities. UKHotViews readers will know that Capita’s ITS ambitions have been in disarray for some time. Last August, MD Mark Quartermaine left after only six months in the job (see Quartermaine leaves Capita), and we have been questioning its decision to pursue ‘vanilla IT services’ while competitors were specialising (see Capita: a new force in UK IT services?).
The sale confirms our view that PE backers KKR have been viewing Northgate’s three businesses – Northgate Public Sector (NPS); Northgate Arinso (NGA) and Northgate Managed Services (NMS) as a ‘divide-and-sell’ opportunity. The departure of long-time CEO Chris Stone in 2011 (see here) (and the appointment of his successor Adel Al-Saleh) did little to dispel the feeling that KKR was preparing for an exit. Then, last November, NMS’ CEO Andy Ross left the business after 9 years at the helm. Crucially, the three businesses continued to be run as separate companies with little attempt to integrate them or find draw on potential synergies.
KKR has effectively sold NMS for a significant loss on its investment. The acquisition of Northgate as a whole was for £1.1bn in March 2008. At the time, NMS represented 23% of the Northgate’s turnover (FY08) (now only 17% because of the acquisitions made by NGA since then). So, although a simplification, you could say that NMS was bought for about £253m in 2008. The sale to Capita has therefore netted KKR almost 75% less than they paid for it.
The announcement begs numerous questions. For instance, where does this leave the other two Northgate businesses, and how does KKR intend to get a return on these investments? In terms of Capita’s IT services strategy, where does this deal fit in relation to the string of others Capita has made in ITS over the past couple of years and how does the deal add value to Capita’s true ‘knitting’ in BPS? There is plenty more to say, which we will do later for subscribers to TechMarketView subscription services.