Good deal, bad deal — Fujitsu's acquisition of Kaz from Telstra

Third time lucky or is the dowry too big? Ovum’s Principal Analyst for ICT Services and Sourcing, Asia Pacific, Jens Butler, comments on the proposed acquisition of Kaz by Fujitsu.

Has Fujitsu got the right assets for the right price and the right reasons? Time will tell. Finally, Fujitsu gets depth and breadth access to Canberra, but at what cost? After one of the longest courtships in recent times, Fujitsu announced its acquisition of Kaz from Telstra for $200m this week.

This deal makes sense at many levels — it provides Fujitsu with access to a large number of federal government accounts and expands its delivery resources, and Telstra is finally able to offload its problem child IT arm for a fair price.

The acquisition sees Fujitsu leap to AU$1.1bn of services revenue, making it the third largest services provider in Australia, as well as bolstering its position in an as yet untapped federal government IT market .

There is value in the purchase — but only if it is delivered to key stakeholders.

This purchase will push Fujitsu’s IT services annuity revenue to 75%. Given that services revenue is still holding up (at IBM, HP, Logica and even locally at SMS and CSG) whereas the hardware/infrastructure and to some extent even software spend is dropping off, an expansion into the federal government services space is a wise move. In addition, this will potentially enable Fujitsu to compete on a larger scale against the likes of IBM, HP/EDS and CSC across Australia.

Given that three quarters of the federal government’s ICT contract portfolio will be renewed over the next few years, the opportunity to avoid the lottery of open tenders and gain a market presence over the next 18 months will have been a key value proposition for this deal. The real risk lies with the amount of deals that do go out to market vs having their contracts extended.

Currently, Kaz has federal contracts equating to about $142m in 2007/2008 in value (plus $300m in forward value), and this is not just the large ones such as Customs (applications management) and Defence (professional services), but also a broad spread across a large number of agencies (over 400 contracts), providing both breadth and depth. In addition, Kaz is also on the short list for the key end-user computing component of the current ATO/EDS contract.

For Kaz, it finally removes four and a half years of uncertainty and also provides customers with a level of certainty and stability. Historically, telcos have not had the best track record of managing IT services acquisitions (Optus/Alphawest, Commander/Volante, KPN/Getronics …) and Telstra has been planning this for a while (this being the third attempt at the walk up the aisle). Given it originally purchased Kaz for $333m, and subsequently sold Australian Administration Services for $215m, Telstra has got its money back. And with its current focus on its new Network Enterprise Services (NES) offerings, it needed to get the right partner and the right price, to remove any confusion between the Telstra NES and Kaz offerings.

This deal will also send out a message that may force some of the competition (see IBM, HP/EDS and CSC) to consider alternative approaches and impact the status quo. Consolidation, especially in the Australian IT services markets, has long been overdue and this may kickstart another round … which will benefit customers.