Beyondsoft in New Outsourcing M&A 博彦科技加入IT外包并购行列

Less than 2 weeks after HiSoft (Nasdaq: HSFT) and VanceInfo (NYSE: VIT) announced their landmark merger agreement, we’re getting word of another significant acquisition in the IT outsourcing space with a new purchase plan by China-listed Beyondsoft (Shenzhen: 002649). The rapid announcement of 2 such major deals could indicate that much-needed consolidation is finally coming to this lucrative but highly fragmented industry, which holds the potential to produce major companies that could someday rival big Indian outsourcing firms like Infosys (Mumbai: INFY).

China’s low costs, well-educated labor workforce and strong infrastructure have led many to predict for years now that the country would soon become a major player in the IT outsourcing business. But despite those predictions, the country has yet to produce any major players as the industry remains largely fragmented without any clear leaders. That could soon change, however, following the announcement less than 2 weeks ago that HiSoft and VanceInfo, the top 2 US-listed players, would merge to create an industry leader with more than $670 million in annual revenue and $875 million in combined market capitalization. (previous post)

Now we are getting word that Beyondsoft is joining the M&A rush with plans to buy Achievo Corp’s Asia-based assets in Japan and the Chinese cities of Beijing, Shanghai and Chengdu for $56 million. (English article) Of course Beyondsoft itself is hardly a major company, with a market capitalization of just $400 million, making it just half the size of the new HiSoft-VanceInfo and a tiny fraction of the size of global leaders like Infosys and Accenture (NYSE: ACN).

Still, these kinds of deals could soon help to produce China’s first billion-dollar IT services company, which could quickly grow to become a global leader by helping to consolidate a home market filled with smaller players. One potential candidate for acquisition could be the third-largest US-listed player, Camelot Information Systems (NYSE: CIS), with a modest market capitalization of $100 and annual revenue of about $250 million.

Camelot has faced a number of issues over the past year, including the departure of its COO and slowing growth for its core business catering to China’s banking sector. (previous post) Camelot’s stock has fallen by about two-thirds over the last year due to company-specific and industry-wide issues, though its shares have staged a small rally over the last 2 weeks, possibly as people see the firm as the next acquisition target.

Camelot has also just announced its latest quarterly results, which don’t look particularly impressive but also don’t seem to contain any more bad news. (results announcement) After hitting some weakness, Camelot’s revenue and profit growth both appear to be back on a positive track, and the company reaffirmed its previous revenue and profit guidance for the current calendar year.

After their recent rally, Camelot shares were largely unchanged on this latest earnings report, which is perhaps a good sign as it means investors think the stock’s recent gains are justified. From a broader perspective, look for the IT outsourcing consolidation to potentially accelerate in the next 12 months, with China’s first $1 billion company in the space potentially emerging by the end of next year.

Bottom line: A new acquisition by Beyondsoft indicates consolidation may be accelerating in China’s IT outsourcing services sector.

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