Drama came to the usually relatively quiet waters of the IT training industry in the last few weeks. It kicked off with Xpertise, placed third in last year's IT Training company revenue charts compiled by IT Skills Research, making an offer to buy Parity Training on 23 July. However, before its shareholders had chance to express an opinion, industry number one QA-IQ leapt into action, and made an offer to buy Xpertise shares.
A condition of that offer was that Xpertise abandon its proposed purchase of Parity Training. At the shareholders' meeting on 26 August, Xpertise shareholders voted to reject the Parity deal, freeing the way for the QA-IQ takeover to go through.
The next day, QA-IQ increased its offer to Xpertise shareholders from 150p to 165p per share, more than twice the closing price of 77p on 21 August, the last business day prior to the initial announcement. Xpertise directors recommended the 165p offer and, by 19 September, QA-IQ had received pledges of more than 50 per cent of shares, making the acquisition unconditional.
The revenues of the combined company, QA-Xpertise (a working name until a definitive one is picked), add up to over £80 million (QA-IQ £63 million and Xpertise £22m), almost four times those of second placed Learning Tree, which made £23 million last year.
David Pardo, MD of IT Skills Research, said: 'Never has a player in this industry been so dominant - the combined business now has a 17-18 per cent market share. That said, compared to other industries, its share is not so large and the industry is still not particularly consolidated.'
William Macpherson, CEO of QA-IQ at the time, and now CEO of QA-Xpertise, echoed Pardo's views. 'We are quite large in our industry but not compared to the suppliers and customers. The latter look at the range of courses, locations and services we offer.
'Being larger can give enormous advantages in terms of range, frequency and number of locations. The advantages of scale mean we have a stronger offering. If businesses were available to buy, it made sense to us.
'Englefield, the private equity investors, who bought QA-IQ last summer, had always admired Xpertise, as had I. However, when Xpertise announced the Parity deal, it's not the route we would have chosen to go down.'
Why did the terms of the QA-IQ offer exclude Parity? 'We did not want to buy two things at once,' said Macpherson. 'We were eager to have Xpertise, but didn't want to buy it in the middle of an integration. Also, I know Parity less well.'
The conditions for the acquisition were in QA-IQ's favour, as Pardo explained: 'Xpertise's vulnerability was that its share price was low, making its market capitalisation disappointingly small. QA-IQ only paid £9.6 million for a company with a turnover of £22 million, despite Xpertise growing and being profitable with one of the strongest management teams in our industry.
'It's a strategic strike by QA-IQ, which has taken out a company that had become its closest rival on both quality and reach. It's unusual for a company to acquire another with such a similar offering; they usually look more for complementary businesses.'
Macpherson, however, emphasised that the union does strengthen certain areas. For instance, Xpertise had a stronger schedule in Leeds and Manchester, and the merger therefore increased the service offering there, which means more frequency for certain courses.
QA-IQ was strong in technical team leadership, while Xpertise was strong in customer excellence, he said.
Mergers and acquisitions in IT training have not always been successful, however, Pardo pointed out. Indeed, QA's takeover of the Capgemini business could be blamed in part for the financial difficulties that led to its takeover by Interquad to form QA-IQ. However, this is the first time that a private equity firm has got involved in the industry, and its influence and experience may make the difference.
Macpherson naturally thinks they can pull it off: 'QA-IQ and Xpertise are surprisingly similar. There are far more similarities than differences. I've done more than 20 acquisitions of education businesses. This one is trickier because we are aiming for a merger, which is more complicated than integrating a stand-alone business or a simple takeover of a business, but the prize is worth it. The trick is to communicate early, and business as usual has to be the key focus.'
Richard Chappell, UK MD of Learning Tree, is not surprisingly more cynical: 'There are always challenges to merging different organisations. Interquad was seen as responsible for commoditising the IT training market and deflating prices in the industry. Now it's becoming a grown-up in terms of infrastructure and costs, and not under the same price pressure from the recent price war with Xpertise. 'We'll charge no different, but it will be interesting to see what QA-Xpertise do.'
On pricing, Macpherson said: 'Our hereditary culture has been about providing great value. With a greater offer, value is about reducing price. Many of our customers are facing harder economic times and we want to help reduce cost where that is their wish. The market will stay sensitive to price. We intend to save costs centrally.'
Combining two businesses
Macpherson was at pains to stress that although QA-IQ bought Xpertise, they are approaching it as a merger inside, combining two businesses. Representatives from both companies are, for example, on the executive board.
'It's very much a merger of best of breed,' said Macpherson. 'Ben Pike and Bill Walker [former Xpertise directors] have joined our executive board. The head office functions will be spread over the three former HQs - Slough, Swindon and Leeds, along with the executive board.
'Our first task is managing the integration while focusing on business as usual. That will take a couple of months or so. We also plan to cement our position as first choice provider for technology training.
'The second task is to have an unparalleled offer in terms of managed learning services.
'Thirdly, our ambition is to grow in soft skills - professional skills, ie ITIL®, project management - and in the management development space. We would also aim to target non-technology departments.'
Are there more acquisitions on the cards? 'Well that's like asking someone to dance, we need to ask and get a positive response,' said Macpherson. 'We would acquire the right businesses at the right prices.'
And what about the rest of the market: 'I think consolidation in the market is likely to continue for the reasons that we have grown.'
One thing for sure is that certain IT training companies are already for sale. Parity is back on the market and Global Knowledge has reportedly been for sale for a while. Learning Tree, too, is seeking a buyer. Chappell confirmed: 'A couple of American investment banks are doing due diligence, but it will depend on what offer they make as to whether the bid is successful. The co-founders are looking to retire, but the company is cash rich, so it doesn’t need to sell. It’s not a good time to get an attractive price.'
It may not be a good time to sell, but it's arguably a good time to buy, so watch out for more ripples in the waters in the months to come.
New face at the top
William Macpherson is a new face in the IT training industry, shifting over from running education companies specialising in accountancy. Most recently he was the chief executive of Kaplan Professional and International, a major learning services organisation with sales in excess of $500 million. Kaplan is now the second largest in its market in the UK.
Macpherson first began leading training companies in 1995 when he became chief executive of Financial Training, which he built into one of the UK's largest accountancy training businesses.
Why did he take the QA-IQ job? 'I love the world of commercial education - we can be really proud of what we do, providing education skills that make people do better in their job,' he said. 'It's a growing industry in the long term - people need ever more education and more skills.'