Following discussions that continued for more than 12 months, Telstra today announced it had finalized sale of its IT services arm, Kaz Group, to Fujitsu for $200 million.
Telstra acquired Kaz for $333 million in 2004, but since then has sold off several components of the business.
Kaz had been on the market for some time, with Fujitsu apparently the only serious bidder. Early in 2008, rumours were rife that Fujitsu was about to acquire Kaz, but the parties could not agree on price. Then in mid-year, discussions between Telstra and Fujitsu recommenced, before Telstra declared its intention to retain Kaz.
As noted by Peter Kazacos (the founder and former owner of Kaz) in an article last year, “The gold in Kaz is its Canberra [government] business … If an organisation didn't have a strong presence in Canberra, picking up Kaz could be very valuable."
Kaz is a major force in government markets, particularly the Federal Government market where it has ranked amongst the top 10 suppliers for the past five years.
On the back of a major desktop support outsourcing contract with Department of Defence, it achieved number two position in the 2005-06 rankings ahead of its owner Telstra, with total contracts awarded that year valued at $317m.
Kaz currently has a number of major contracts in place. An analysis of Intermedium’s contracts data shows Kaz has 100 active contracts in place. Based on the value and length of the contracts, Intermedium estimates there may be as much as $95 million in revenue still owing on these contracts, more than 80% of it with Defence.
However, Fujitsu’s share of the Federal Government market has declined in recent years. Fujitsu was ranked in the top 20 suppliers between 2003/04 and 2005-06, with major contracts at CSIRO, IP Australia and DHA. In 2006-07 it slipped to just stay in the top 50, before recovering to reach number 30 in 2007-08. Fujitsu is strong in state governments, with major contracts in NSW, VIC and QLD, so the Kaz acquisition makes good sense to strengthen its public sector portfolio.
The decision by Fujitsu to purchase Kaz reflects its recognition of a change in the government IT landscape. Intermedium research shows the value of IT Services category of the Federal ICT market grew almost two and a half times in the period 2003-04 and its peak in 2006-07 of more than $750m, before dropping to $666m in 2007-08.
Fujitsu follows the lead of other suppliers that have acquired companies to strengthen their offerings in the services field, most notably HP’s purchase of EDS.
The purchase of Kaz will make Fujitsu the third largest IT company in Australia, employing nearly 5,000 people. However, based on the Federal Government contracts awarded to both Kaz and Fujitsu in 2007-08, the combined company would be ranked number 5.
Telstra's enterprise and government unit managing director David Thodey said that the company was selling Kaz because IT services was no longer a core part of its strategy.
The acquisition of Kaz by Fujitsu sees another major Australian IT company go offshore. It remains to be seen whether this may create problems in relation to some contracts that have stringent security clearance requirements.