Completed acquisition by Capita Group plc of IBS OPENSystems plc

Affected market: Provision of IT services to government

No. ME/3841/08

Please note that the full text of the decision can be downloaded by using the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, third party views, assessment and decision.

The OFT's decision on reference under section 22(1) given on 19 November 2008. Full text of decision published 10 December 2008.

Please note that square brackets indicate figures or text which have been deleted or replaced at the request of the parties for reasons of commercial confidentiality.

PARTIES

Capita Group plc (Capita) operates in the business process outsourcing sector and provides a full range of support services comprising back office business, processes, customer contract services, administration and support, human resources, information technology, property and infrastructure consultancy, finance, treasury and shareholder services and management and property consultancy. A business division of Capita, Capita Software Services, supplies revenues, benefits, payment management, e-government and integrated housing management systems within the public sector and social housing marketplace.

IBS OPENSystems plc (IBS) provides software and supporting services to local authorities and housing organisations throughout the UK. Its services comprise: the provision of housing management solutions, revenues and benefits solutions, works management solutions and solutions facilitating control of all key financial tasks to create an organisation-wide total management solution.

TRANSACTION

On 26 June 2008 Capita's offer for the entire issued share capital of IBS was declared unconditional in all respects and completed on the same date. The Office of Fair Trading (OFT) sent an enquiry letter to Capita on 21 August and in response Capita made an informal submission to the OFT on 15 September 2008. The four month statutory timetable (as extended) expires on 20 November 2008.

JURISDICTION

The OFT believes that as a result of this transaction enterprises have ceased to be distinct for the purposes of the Enterprise Act 2002 (the Act). In one of the areas of overlap between the parties - the provision of revenue and benefits applications and related services to local authorities in the UK - the parties' estimated combined share of supply is in excess of 25 per cent. The share of supply test in section 23 of the Act is therefore satisfied. Therefore the OFT believes that it is or may be the case that a relevant merger situation has been created.

THIRD PARTY VIEWS

The OFT received a significant amount of negative feedback from customers in the market and these concerns have been addressed in the text of the decision. In summary, third parties confirmed the fact that the market is highly concentrated and that there are a limited number of viable alternatives from which to source their products and services. Moreover, many customers indicated that a reduction of these effective competitors would materially affect their ability to negotiate on price. As a result of these factors the majority of those customers contacted indicated a high degree of concern regarding the merger. Customers also highlighted major switching barriers and a number were concerned that the merger would reduce the merged entity's willingness to customise the software to integrate with the local authorities' systems.

In addition to other actual and potential players in the market commenting on the improbability of entry and expansion (as discussed above), one third party noted that incentives to innovative and develop new software applications may be reduced as a result of the merger.

The OFT received a smaller number of comments in relation to SH software services. Although customers did not necessarily welcome consolidation, all customers were able to list a significant number of alternative suppliers. Most customers said they had a degree of negotiating strength in this market, and no evidence was received to suggest that this would be diminished by the removal of one competitor in the market given the diversity of suppliers.

ASSESSMENT

The parties overlap in the provision R&B software services and the provision of SH services in the UK, which the OFT considers to be separate product markets, respectively.

In relation to R&B software services, the merger combines two closely competing successful bidders, with the parties often being each others' closest constraint. By absorbing IBS, Capita would face a significantly reduced constraint on its competitive behaviour such that it could profitably raise price or otherwise offer less favourable terms in relation, for example, to non-price factors (such as service quality or innovation which is unrelated to regular changes in the legislation) in relation to those contracts for the supply of R&B software solutions that come up for renewal in the future.

The merger would mean that customers are left with only one effective alternative source of supply, Northgate/Anite, whose presence is not sufficient to replicate the competitive discipline posed by IBS absent the merger, when local authorities could benefit from rivalry between three successful bidders.

In relation to legacy contracts, the OFT does not consider that the threat of switching is significant or that there is a material competitive constraint placed on legacy suppliers by competition in the market for other contracts going out to tender. For these reasons, the merger does not create competition concerns in relation to legacy contracts to the extent that they are not put out to tender.

The OFT believes, on the balance of probabilities, that it is case that the transaction has resulted, or may be expected to result, in a substantial lessening of competition, in relation to future contracts for the provision of R&B software services in the UK.

The OFT considered applying the de minimis exception in this case but given the evidence suggesting that the impact of the merger will be significant combined with the uncertainty over the size of the proportion of the market likely to be affected by the merger, the OFT ultimately decided not to apply the de minimis exception.

DECISION

This merger will therefore be referred to the Competition Commission under section 22(1) of the Act.

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