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Affected market:聽Outsourced back office business solutions

狈辞.听惭贰/1671/05

The OFT鈥檚 decision on reference under section 33 given on 13 May 2005. Full text of decision published聽1 June.

PARTIES

Vertex Data Science Limited (Vertex) is a wholly-owned subsidiary of United Utilities plc.聽 Vertex is an international provider of outsourced back office business solutions, including customer management (contact centres and billing), finance and accounting and human resources solutions, to the utility, local and central Government, retail, telecommunications and travel sectors.聽 For the year ended 31 March 2004, Vertex's UK turnover was approximately 拢370 million.

Marlborough Sterling plc (MS) is a provider of outsourced back office (transaction-based) services to the UK financial services sector.聽 MS also provides related technology and software to the financial services sector.聽 MS has three divisions: the Life and Pensions Division which provides outsourced back office administration (e.g. policy processing, customer accounting, underwriting and claims risk management, management accounting, financial accounting, regulatory compliance and actuarial services) for life and pensions companies; the Exchange Division which provides an on-line portal service delivering comparative quotations from life and pensions companies to independent financial advisers; and the Mortgage Division which MS operates under a joint venture with egg plc managing mortgage customer accounts on behalf of mortgage companies.聽 For the year ended 31 December 2004, Marlborough Sterling Group's turnover was 拢98.8 million.

TRANSACTION

Vertex鈥檚 proposal takes the form of a recommended public offering for the whole of the issued and to be issued share capital of MS other than MS shares already owned by United Utilities.聽 The transaction will be effected by means of a scheme of arrangement subject to court and MS shareholder approval.聽 The consideration payable under the proposal is approximately 拢72.2 million.

The parties submitted a merger notice on 14 April 2005 and the 20-working day statutory deadline expires on 13 May 2005.

JURISDICTION

As a result of this transaction Vertex and MS will cease to be distinct.聽 The UK turnover of MS exceeds 拢70 million, so the turnover test in section 23(1) (b) of the Enterprise Act 2002 (the Act) is satisfied.聽 The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.聽

RELEVANT MARKET

The parties overlap in the provision of outsourced back office solutions delivered through proprietary software platforms.

Product scope

Although the parties overlap in the provision of back office outsourcing solutions they operate in different industry segments.聽 MS provides such services to the financial services sector whereas Vertex is active in the utilities, local and central government, retail, telecommunications and travel sectors.

The parties submit that there is no demand side substitution between the different types of outsourcing.聽 This was confirmed by third parties contacted by the OFT.

On supply side substitution the parties submit that in order to gain a foothold into a particular industry sector, a significant amount of investment is required.聽Vertex estimates that in order to gain a 2 per cent share of supply in the life and pensions sector, investment in the region of 拢40-50 million would be required.聽This would cover the cost of building a new software platform to deliver services or to buy an existing client platform.

Vertex contends that in the last three years it has unsuccessfully tried to enter the life and pensions outsourcing sector.聽One of the main reasons cited by Vertex as underlying its failure to enter is that its bids were premised on building a new software platform whereas other competitors in this segment were offering established and proven platforms.聽This is generally supported by third parties who confirm that they would not consider outsourcing to a non-specialist as an option.聽Those third parties who would consider this option generally attach stringent conditions eg retaining specific product expertise, strict governance practices and proven financial record of the service provider.聽

Given the high cost of gaining entry into a particular industry segment and customers' general requirement that the outsourcing service provider must have industry expertise, the information available suggests little prospect of supply side substitution.

Conclusion

In conclusion, evidence from third party customers and Vertex's lack of success in entering the life and pensions sector would suggest that narrow frames of reference delineated by various industry segments would be appropriate.聽 However, given that the OFT concludes that no competition concerns arise on any definition (see below), it is not necessary to reach a firm conclusion on the relevant product frame of reference.

Geographic scope

The parties contend that the geographic scope is at least national.聽Given that no competition concerns arise on any definition, it is likewise unnecessary to reach a firm conclusion on this issue.

HORIZONTAL ISSUES

The parties overlap in the provision of back office outsourcing solutions.聽 To the extent that general business process outsourcing in the UK encompassing all sectors were taken as the relevant frame of reference (contrary to certain indications discussed above), this is a large sector with numerous suppliers and the parties鈥� combined share of supply by volume or value is small (the parties submit significantly less than 10 per cent).聽 Furthermore, if in-house provision were to be taken into account the parties鈥� combined share of supply would be even less.

If a narrow product frame of reference is taken ie back office outsourcing solutions in particular industry segments, the parties submit that there is no overlap as each party specialises in different industry segments.聽 In this regard third party responses do not indicate any occasion in which MS has bid against Vertex.聽 Furthermore, the main rationale for Vertex acquiring MS is that while the life and pensions and mortgages outsourcing is growing, Vertex would find it difficult to enter this particular industry segment.聽 This would imply that pre-merger there is little actual or potential competition between the parties.

Barriers to entry and expansion

Third party comments indicate that new entry may be difficult as customers expect a certain level of expertise and economies of scale before awarding outsourcing contracts.聽However, demand for life and pensions and mortgage outsourcing is a growth area and many IT companies are seeking to enter this segment.聽Given that there are no competition concerns about this transaction, it is not necessary to conclude on barriers to entry.

Buyer power

Given that there are no concerns about this transaction no conclusions are drawn on buyer power.

VERTICAL ISSUES

The OFT has found no evidence that this transaction raises any vertical competition concerns.

THIRD PARTY VIEWS

No third party expressed any concern about this transaction.

ASSESSMENT

This transaction does not appear to raise significant concerns on any reasonable frame of reference.聽The parties' combined share of supply of total back office outsourcing, encompassing all industry sectors, is small.聽 At the level of individual industry segments, the evidence available to the OFT suggests that the parties do not overlap.聽There also appears to have been no occasion in which MS has bid against Vertex.聽This suggests that there is little actual or potential competition between the parties.聽Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the UK.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.