The country’s top two services providers Prokom Software SA and Softbank SA are poised to join forces next year in a deal that will create a 2,300-strong company with an estimated 15% share of its domestic IT market.

The merger between the companies has developed into something of a saga during 2002. In January, Prokom bought 1,500,000 shares in Softbank to increase its minority stake from 0.59% to 9.21%, which the former followed up in September by issuing a letter of intent to add a further 10% to 33% of the capital by buying out part of the shares owned by Softbank chief executive Aleksander Lesz.

Between now and December 6, 2003, Prokom has the right to purchase all of the Lesz’s shares, which represent more than 32% of Softbank’s share capital. Prokom Software will buy the shares in block transactions at a value based on a 20% premium over the mean of the price per Softbank share during the 30 days preceding the transaction, although the price has a ceiling value of PLZ 13. Softbank’s shares traded at PLZ 6.56 on November 20, 2002, down 79% from a 52-week high of PLZ 31.83 in January.

Although the deal will not represent a merger of equals in terms of share ownership, the two companies have made it clear that they intend it to be more than just an investment. Softbank said of the deal in a letter to shareholders in September that it will: …serve as grounds for the initiation and development of a strategic partnership between the two companies focused on marketing IT projects, optimizing costs of financing their activities, and capitalizing on the synergies achieved through the implementation of the projected capital and operational links.

In truth, both companies are in need of a tonic after a tough time in the last two years. The Polish IT services market has not been exempt from the global slowdown in spending on technology projects. Whereas services companies in the US and UK have continued to enjoy strong demand from the public sector, the Polish government has canceled or postponed many of the projects originally planned for the last 12 months, which is largely a hangover from the parliamentary elections that took place in September 2001.

In the third quarter of 2002, Softbank widened its net loss to PLN 130m ($33.1m) from a year-ago loss of PLN 5.6m ($1.4m) on revenue that fell by 19% to PLN 57m ($14.5m). The company’s bottom line was hit by provisioning for assets with PLN 103m ($26.2m) written down for its part-owned internet venture, TDC Internet Polska that has now been sold to Denmark’s TDC. During the same period, Prokom made a net profit of PLN 3.2m ($814,500) compared to a loss of PLN 29m ($7.4m) in the year-ago quarter, on revenue that grew by 34% to PLN 265.2m ($67.5m). Prokom’s results benefited from being compared to a particularly poor third quarter in 2001.

So what synergies are there between the two companies? IDC has estimated that financial services accounted for the largest chunk of the $726m Polish IT services market in 2001, with a share of 31%. One of the main benefits that Prokom will gain from taking operational control of Softbank is that it will put it in a good position to win a potential PLN 700m ($178m) contract with the nation’s largest bank PKO-BP that is expected to be awarded in 2003. Softbank made 30% of its full-year 2001 sales from projects with PKO-BP, but it is Prokom’s CoreBank product that analysts expect PKO-BP to purchase for the contract. Pajak at Bank Pekao said: It is Prokom that has the product here; it’s Softbank that has the references. If it weren’t for Prokom having that product, Softbank’s in-depth knowledge of PKO BP could be in vain.

Looking ahead, research house IDC expects the Polish IT services market to grow at a compound annual growth rate of 11.2% in the three years to 2006 when it is expected to reach $1.2bn. Both Prokom and Softbank are expecting the public sector to be the main driver of growth in the software and services market during the next two years.

Prokom chief Ryszard Krauze highlighted Poland’s entry into the European Union as a key driver for new contracts. The process of integration with the EU is extremely important for us, because member states will be required to develop comprehensive IT systems in order to elevate management standards as well as product and service quality, he said. The Polish government has targeted the end of this year as the date for completing the accession negotiations, which would make Poland ready for membership in 2004.

Source: Computerwire