Tag: mergers & acquisitions

Novartis and GSK Restructure to Adjust to the New Normal | Sherpas in Blue Shirts

Novartis on April 22, 2014, announced a succession of deals in a sweeping restructuring. It agreed to buy GlaxoSmithKline’s (GSK) oncology products unit for US$14.5 billion, plus another US$1.5 billion subject to certain milestones. In turn, it divested its vaccines business to GSK for US$7.1 billion, plus royalties. The two companies also announced the creation of a new consumer healthcare business through a joint venture, in effect combining Novartis’ OTC drug business with GSK’s consumer business, with nearly US$10 billion in annual sales. In a separate deal, it hived off its animal health business to Eli Lilly for US$5.4 billion.

The deals – given their scale and impact – principally reshape Novartis, which has been evaluating its businesses since last year. The move reflects a strategic imperative to focus on higher margin products, such as cancer drugs, and let go of low margin ones, which rely on scale and volume. This signals a momentous shift for the firm, which under its previous chief executive transformed into an expansive healthcare behemoth, fueled primarily by M&As. The deals have substantial implications for GSK as well, reorienting its business across respiratory, HIV, vaccines, and consumer health products – together accounting for nearly roughly 70 percent of its sales. It also consolidates its position as the leading global vaccine player.

These changes reflect an important inflection point for the pharmaceutical industry. The industry is coming to terms with multi-faceted challenges arising out of patent cliff implications, middling R&D productivity, and rising consolidation, leading to a rethink of business models.

Life sciences M&A bandwagon

Life Sciences Mergers and Acquisition Bandwagon

Bigger is not always better

Consolidation has been a standard practice adopted by Big Pharma to tide over industry challenges, maintain growth momentum, diversify into emerging geographical and product markets, beef up R&D efforts, and boost sagging drug pipelines.

However, with middling R&D productivity, patent cliff losses, and expansion into newer product/service lines, pharma companies are reconsidering the conventional paradigm to factor in these multi-pronged challenges. Incessant consolidation has had a detrimental impact on many companies with decreasing post-merger productivity, culture mismatch, integration challenges, and declining agility.

That has resulted in firms such as Novartis refocusing their priorities to focus on core competencies instead of having its fingers in too many pies. These restructuring efforts call for a carefully thought-out technology strategy that encompasses organization-specific challenges and hurdles. The roadmap for pharmaceutical firms must be evaluated on a profitability-productivity matrix to test for efficacy. The imperatives brought by wholesale value chain digitization in the pharmaceutical industry entail a re-examination of the organizational structure and resource allocation/rationalization required for driving top line and bottom line growth. Technology will serve as a key enabler to free up resources and ensure optimal utilization levels.

The profitability-productivity matrix of pharmaceutical firms

Profitability-productivity Matrix of Pharmaceutical Firms

Big Pharma will continue to take the acquisitions route as new drug development becomes more expensive and exhibits declining productivity. But companies need to take a more balanced and individualized approach as they assess their unique value proposition and go-to-market strategies in order to thrive in the new world order.

Sizing Up PwC’s Acquisition of Booz | Sherpas in Blue Shirts

PwC announced last Friday that it completed its acquisition of Booz & Company — now named “Strategy&.” Why did Booz agree to be acquired and why did PwC want Booz? And what does this mean for the services industry? My opinion: It’s a bold move that has the signs of being a game-changer in the global services world.

Booz had a trouble spot. I’ve blogged before about this phenomenon — the growing power of large consultancy groups and service providers’ ability to utilize access to their existing customer base to increase their revenue. It enables the rich to get richer. The champions of this strategy are the Big Four (Deloitte, E&Y, KPMG and PwC in the consultancy arena) and Accenture, Cognizant and TCS, to mention a few in the provider landscape.

Even though Booz had one of the most venerable, respected brands in strategic consulting for the past 100 years, it became increasingly difficult to drive consistent customer access. Booz believes it will be easier to succeed in this strategy of radiating to advantage by meeting client needs within the PwC family rather than having to blaze its own trail.

Using existing customers to grow a services business is a proven model that Deloitte certainly demonstrates in today’s marketplace, and PwC enjoyed the advantages of this model before the SEC asked it to divest services years ago.

PwC perspective

Bringing Booz into the PwC network is a bold commitment signaling that PwC intends to join Accenture and Deloitte as a major transformational player. PwC has been studiously building back its consulting and advisory services since its divestiture, and the Booz acquisition adds the high-end strategy capability that will enable PwC to be a strong value player in advising and driving major transformation deals.

What it means for the services industry

The arrival of PwC Strategy& in the marketplace changes the provider landscape significantly. It adds another true power with a broad set of capabilities stretching from the boardroom and strategy to implementation. And it will contest the market for large-scale transformational work.

In that contest, it will prove interesting to see which providers lose some market share to PwC Strategy&.  Will this new power inhibit Deloitte’s growth? Will it affect Accenture and IBM? Will it affect the aspirations of Cognizant, TCS and Wipro as they look to join the transformational party?

One thing is for sure: The transformational dance floor is getting crowded.

IBM Prepares to Deliver Consumption Based, As-a-Service Offerings | Gaining Altitude in the Cloud

IBM in late February launched BlueMix, a billion-dollar investment in a Platform-as-a-Service (PaaS) cloud based on its recent empire-building acquisition of SoftLayer. A TBR analyst says IBM’s as-a-service moves are changing the company’s DNA. My opinion? It’s a lot more significant than that! If Big Blue can integrate all its services in a true consumption-based model, it could set the standard for the new service model industry wide. The question is: Is this the way of the future?

The dilemma

Here’s the dilemma that faces the market and motivates IBM’s strategy. As I’ve blogged before, customers want consumption-based services. This means:

  • They only want to pay for what they use. They don’t want to pre-commit to volumes because they overpay when they do that. When they use a lot, they’re prepared to pay a lot; when they use a little, they only want to pay a little.
  • They want providers to make it easy to adopt their services. They don’t want big road maps and huge implementation schedules. Easy on, easy off is what they desire.

We see this fundamental desire for consumption-based coming across all service lines. But it leaves traditional service providers hamstrung to meet customer demands.

There are two routes to the change to consumption-based services:

  • Service delivery in a multi-tenant world — one platform and all customers use the same thing
  • Supply chain — completely integrate a consumption-based supply chain

The problem with a remedy for the dilemma

The problem is that the multi-tenant path does everything for providers but nothing for customers. Larger, sophisticated companies have different needs, but the multi-tenant platform forces customers to be the same as everyone else. Salesforce and other providers accommodate this issue with configuration vehicles, but fundamentally they have an unyielding standard. So providers must ask their customers to change their needs to meet the product’s standards rather than the product changing to meet the customer’s desires.

It’s a thing of beauty and a joy forever if a provider can get its customers to do that. But there are a very limited number of areas, and customers, where that can happen.

The alternative remedy

The alternative is to turn a provider’s entire supply chain into a consumption-based supply chain. This is the IBM strategy.

This path eliminates stranded costs. It also eliminates the problem of misaligned provider/customer interests that create a lot of friction in the market today. The traditional service model creates take-or-pay situations in which the provider has to provide the service whether or not the customer uses it — thus the misaligned interests.

That’s why what IBM is doing is so important. I’ve blogged before about how IBM’s recent acquisitions of SoftLayer, UrbanCode, Green Hat and Big Fix were the components of building a complete as-a-service stack from the bare iron up through the platform to the business process services. This fundamentally enables IBM to migrate to an end-to-end consumption-based world.

We have yet to see IBM roll this through in its fundamental pricing, but it’s still early; Big Blue has just now assembled the stack. But if it truly goes to market with the end-to-end consumption model, IBM will be able to address market needs much more completely than competitors, which are faced with the dilemma of having to take the risk on stranded costs and effectively price higher because of inefficient delivery models.

That’s what IBM has been putting in place. Is IBM leading in the way to the future in services? What do you think?

IBM Remakes Itself | Sherpas in Blue Shirts

You can bet IBM Global Services doesn’t want any more earnings announcements like its Q4 2013 report.  Big Blue posted year-over-year revenue growth of only 4 percent instead of the 7 percent it indicated just three months ago and its 5 percent Q3 growth. Its margins are good, but clearly IBM has a growth issue. However, IBM is unfolding its strategic readjustment to drive global services growth in the future. It’s a three-pronged plan.

1. The exit path

Step one is to jettison the low-margin, commoditized and mature parts of the business, and I’ve blogged before about the crucial timing aspect of this strategy.

2. What is IBM doing with two acquisitions per month?

In the plan’s second prong IBM replaces its jettisoned revenue and direction by acquiring both software and services businesses. At the moment its acquisition pace is torrid — a little over two companies a month!

Rather than building products to move into more profitable business areas, Big Blue is buying companies so it can quickly shift high-growth platforms and embracing automation and the cloud. Four acquisitions show us where IBM is doubling down on acquiring capabilities:

  • Softlayer (2013) — global cloud infrastructure
  • UrbanCode (2013) — software delivery automation
  • Green Hat (2012) — software quality and testing for cloud
  • Big Fix (2010) — management and automation for security and compliance software updates

Two particular focus areas in automation platform and services stand out:

  • Analytics (automation of high-end analysis)
  • BPaaS (Business Process as a Service), which is an automated version of IBM’s infrastructure business.

Years ago IBM put hard caps on scaling the company by adding headcount, and this is a driver in chasing automation as IBM exits low-margin, labor-arbitrage offerings.

3. Battle-tested advantage

Unlike many of its peers building and piloting solutions and products, the third prong in IBM’s growth plan ensures the companies it acquires have fully formed battle-tested models. Instead of creating a baby that has to crawl before it walks, IBM acquires “teenagers” that can run — companies that already conducted pilots and ensured there is a market for the offerings. And then IBM super-charges the model with Big Blue’s awesome brand and sales and marketing strategies. This is a time-tested formula that has worked for IBM in the past.

As we watch IBM remake itself in this three-part plan to drive services growth, we expect the strategy will be successful.

Photo credit: Irish Typepad

Convergys to Acquire Stream – Can Leading CCO Providers Get the Mix Right Between Scale and Value? | Sherpas in Blue Shirts

Last week Convergys announced it plans to acquire Stream International. This combination of two large U.S.-based providers creates the world’s second largest Contact Center Outsourcing (CCO) provider, with a combined revenue topping the US$3 billion mark. Convergys stands to gain an expanded set of service delivery capabilities, client segments and regional presence.

As competition in the CCO market heats up, service providers are actively looking around for attractive opportunities for acquiring their way to growth and expanded offerings. Over the past two to three years several CCO M&A deals have been announced. These deals target a number of specific objectives, which Everest Group categorizes into three types – capabilities augmentation, scale enhancement and footprint expansion. Capabilities enhancement was the primary driver for nine of the more recent deals, making it the most prevalent investment area.

Key M&As in CCO space in 2011-2013 

Key M&As in CCO space in 2011-2013.jpg

Two key objectives drive Convergys’ acquisition of Stream, scale enhancement and client base expansion. On the other hand, the other CCO mergers in the past year and a half had different sets of objectives. Concentrix’s acquisition of IBM’s CCO (October 2013) business and Sykes’ acquisition of Alpine Access (July 2012) were driven by capability enhancements. In contrast, Webhelp Group’s acquisition of HEROtsc (February 2013) and Capita’s acquisition of Full Circle (June 2012) were driven by delivery footprint expansion.

While the deal ensures top line growth, we wonder how Convergys plans to tackle bottom-line growth. In our opinion, CCO leaders will need to balance scale-driven growth with more profitable organic growth among the existing client portfolio. The trick to achieving this growth involves effectively addressing ever-increasing client expectations around customer experience management and end-to-end multi-channel customer interaction. Everest Group research shows that over the past few years CCO clients have expanded the number and nature of the processes included in their engagements, with value-added services growing the fastest among all process areas.

For the gears to keep powering growth long after acquisitions have been digested, CCO service providers will have to focus on value-added services that expand existing client engagements and create differentiation in the market.

For more analysis, download our complimentary viewpoint on this topic.

Accenture + Procurian = a Hard to Beat Procurement Outsourcing Capability | Sherpas in Blue Shirts

When Accenture completes its acquisition of Procurian, (announced October 3, 2013, and expected to close by end of 2013), the firm will hold a formidable one-third of the procurement outsourcing (PO) outsourcing marketplace.

For non-regular followers of the PO space, Procurian was incepted in 2000 per its own acquisition of Accenture’s ePValue e-procurement venture. The somewhat latent PO market finally found its footing, with a US$1.7 billion and a five-year CAGR of 13 percent in 2013.

While the PO marketplace has become increasingly competitive in the past several years, as evidenced by numerous acquisitions by Xchanging, IBM, Infosys, and GEP, Accenture’s acquisition of Procurian represents a game changer in the PO space, and has far-reaching implications for providers and buyers alike.

The new dynamics in PO?

  • IBM and Genpact will be impacted, as IBM will no longer be the number one provider of PO providers, and Genpact will lose footing in its strategic partnerships via Procurian relationships with clients such as Zurich, Hertz, and Kimberly Clarke
  • The PO market will become more concentrated with the two top players – Accenture + Procurian and IBM – accounting for nearly 60 percent of the PO market.

Bottom line, given the combined capabilities of Accenture and its come-back-home compatriot Procurian, this new PO powerhouse should make other global service providers step back and think about their PO service capabilities.

For more details on the Accenture/Procurian acquisition, and Everest Group’s insights on it, please go to: Accenture + Procurian = One-Third of the Procurement Outsourcing Market viewpoint.

The Pinstripe/Ochre House Merger: Proof that the Single RPO Provider Model Trumps Partnerships | Sherpas in Blue Shirts

In the earlier days of the recruitment process outsourcing (RPO) and broader talent management services industry, partnerships between providers as a means to deliver enhanced service offerings and greater geographic coverage were common. Yet, in the past couple of years, many of these partners have taken the M&A path in response to increasing buy-side desire for consistency and standardization in their recruitment operations.

The Pinstripe/Ochre House merger – announced on July 18, 2013 – certainly plays to the market’s preference for a single provider model. Yet, in their case, the drivers extended beyond buyers’ preference for a single provider model, complimentary capabilities, and a time-tested partnership construct. In fact, Pinstripe could have faced serious client, potential new business, and time-to-market losses had it not taken the merger route.

So what does Everest Group see as the key implications of Pinstripe’s and Ochre House’s union? As excerpted from our just-released breaking viewpoint on the merger:

  • It trumpets the departure of partnership-based RPO models, in favor of single, end-to-end providers
  • It propels the combined firm solidly into the Leaders category on Everest Group’s RPO PEAK Matrix
  • It provides both companies’ clients with geographic and service expansion opportunities
  • It will drive greater attention within the RPO market from the investor community
  • Despite the complimentary nature of the firms, (including TAAHEED and Carmichael Fisher, which Ochre House acquired in 2012), lack of clarity on the integration path is likely to delay the synergy realization
  • The combined entity will still need to figure out how to fill emerging market gaps

For more details on the merger and its impact on the market – both buy-side and sell-side – please see Everest Group’s breaking viewpoint, Pinstripe Merges with Ochre House: Demise of Partnership-Based RPO Model.

Will Infosys Need to Acquire BPO and Infrastructure Properties Before it Can Reignite Traditional Outsourcing Growth? | Sherpas in Blue Shirts

Recently Infosys posted better-than-expected earnings. But it also indicated an upcoming adjustment in strategy, stating it plans to pursue growth through traditional outsourcing contracts and will deemphasize its focus on software as a source of growth.

Infosys has long been a stalwart of the Indian heritage firms and built its impressive growth and profitability through the outsourcing and services space. However, the company is not as well positioned to drive growth in these areas as it once was.

Historically it was a powerhouse in application outsourcing (AO), and Infosys still maintains this strength. However, AO’s growth rate is slowing and there are fewer large AO opportunities available in the marketplace.

Outsourcing growth has shifted to both the BPO and infrastructure spaces. In these areas, Infosys is not as strong as it is in AO and is not as strong as its competitors.

Therefore, if Infosys looks to drive growth rates above the industry average in large outsourcing transactions, it will need to significantly improve its positioning in either or both BPO and infrastructure. In today’s marketplace, we believe Infosys lacks the ability to grow organically in these areas at the rate required to meet the company’s overall growth objectives.

To execute its growth path, Infosys needs to adopt an acquisition strategy and grow inorganically. Before it can grow, it needs to make a significant move to acquire assets upon which it can build and grow in the attractive BPO and infrastructure spaces.

We believe this is the most effective strategy Infosys can utilize to achieve the necessary growth rates within its investors’ time frame to meet its objectives.

Photo credit: Wikipedia

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