M&A Impact: Wang Goes to Getronics Rather Than Going Global

Computergram International, May 17, 1999

By Krishna Roy

When Dutch IT services company, Getronics, announced its intentions to buy US desktop and network integration consultancy, Wang Global, for $2bn last week, the writing was already on the wall. The acquisition could have been anticipated. Wang was ripe for takeover. "If Getronics wasn't going to buy them, someone else would," says Coleen Kaiser at Bank Boston Robertson Stephens.

Getronics' attraction as an acquisition target was partly due to the M&A climate in Europe and partly a result of its recent financial record. Having bought a European IT consultancy over double its own size with the purchase of Olivetti's Olsy systems integration business in March 1998, US-focused Wang thrust itself onto the world stage as a $1.9bn global consulting organization. But the growing pains involved to get to this stage proved too much to bear. Although the $390m acquisition enabled Wang to continue growing at a 30% clip, Wall Street refused to ignore the rather large restructuring charge it took for Olsy, which when finally announced amounted to $380m or $10m less than the value of the transaction itself. The acquisition write-downs subsequently ate into quarterly earnings. Wang's share price began to plummet and even though the integration was completed in the first quarter 1999 within budget and within the specified time frame, investors refused to see the Olsy acquisition as anything other than an abject failure.

This latest takeover would probably not have not taken place at all had it not been for the prosperous climate within European hi-tech companies right now. Wang Global's acquisition by a European computer services provider signifies a shifting balance with the services sector as a whole. Where once M&A in services were primarily driven by a US company's ability to use its purchasing power to buy a European counterpart, IT services companies in Europe are now in a position to fund global expansion through US services acquisitions.

Consequently, Europe-US deal-making activity is being pursued with a new vigor. Last month, Cap Gemini, the largest independent European IT services company bought Beechwood, a US telecoms services consultancy for $200m, in the first of, no doubt, many more US acquisitions. Cap Gemini has filed for a listing on Nasdaq or NYSE in a bid to raise its profile and purchasing power in the US. Logica, another key player in Europe, has made US acquisitions a primary focus. It bought customer management services provider, the Carnegie Group, in October 1998. While another rival, The Sema Group, has stated that its future ambitions lay stateside and says it intends making acquisitions to penetrate this market. In purchasing Wang Global, Getronics, was therefore following a precedent set by its competitors in Europe.

But where does this purchasing power come from? "European IT consultancies are currently in a very strong position. They all have very high valuations and high P/E multiples so US acquisitions are cheap," says Kaiser. European services companies are also seeing unprecedented growth rates, according to Kaiser. "Y2K related business has really boosted the market in Europe. Where most of these companies were seeing revenue increases of 10%-15% a couple of years ago, they are now seeing rates in excess of 30%. There aren't enough safe bets in European hi-tech either and services companies have proved to be a good investment bet because they are safe and doing well," she says.

It's easy to see how Getronics was able to step in and snap up Wang Global. And furthermore rescue Wang from investors' ire by providing shareholders with a healthy return on a stock that has been suffering ever since it bought Olsy. Getronics will pay Wang Global stockholders $29.25 per share of common stock in cash, a 39% premium over Wang's share price in the last 90 days.

The deal was also well-timed. Wang had just completed its restructuring and had taken the last $51.5m charge for first quarter 1999. Getronics purchases a company that has already trimmed excess fat and therefore will not have to undergo any further restructuring, it claims. Furthermore, the announcement of yet another charge laden quarter had only served to push its share price lower.

When the deal closes in July, Getronics will emerge from relative obscurity as a $1.65bn service companies with 75% of its business in Benelux countries, into a $3.65bn giant with a foothold in the US and virtually every other country in Europe. Then the company could lay justifiable claims to becoming the fifth largest services company in the world and the third largest in Europe. But perhaps what is more surprising is that Getronics will have a higher market cap than Cap Gemini, the largest computer services provider in Europe. Getronics can be expected to have a $5bn valuation against Cap Gemini's current $4.2bn.

Getronics has always been fairly acquisitive and has made 19 acquisitions since 1986, but the Wang Global transaction marks a significant departure from its previous M&A blueprint. Getronics has tended to buy mid-range companies in Europe with local expertise. Wang will be by far the largest acquisition it has made to date and the first with a significant US presence. Getronics has long needed to change its acquisition strategy. The company had reached double-digit growth in the Netherlands and could not extricate any more business from its existing operations. To continue growing it needed to become pan-European at the very least. "Grow or die. Those were the options open to us," says a Getronics spokesperson.