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EPAM Systems Continues on Growth Path Through Merger

Budapest Business Journal – by Robert Smyth

EPAM Systems Inc., a global provider of software engineering outsourcing services with Hungarian links, is growing according to plan through its new strategic merger with Vested Development, Inc. (VDI), a Russia-based, global onsite/offshore software development services firm.

"This merger enhances EPAM's position as the leader in Central and Eastern Europe and allows EPAM to offer the strongest alternative to current mainstream outsourcing destinations," said Arkadiy Dobkin, EPAM Chairman, CEO and co-founder, who will continue leading EPAM's operations.

"For many years, it was anticipated that the CEE region would provide a sizeable and scalable global player. This expectation has finally materialized," he said.

The combined company, operating as EPAM Systems, has more than $70 million in revenue with which to operate and will employ over 2,200 software professionals across eight countries. Specific terms of the deal, however, have not been disclosed.

In 2003, EPAM Systems merged with Fathom Technology, a company based in Budapest. Karl Robb, executive vice-president of EPAM Systems and president of EPAM's EU business unit, was one of Fathom's co-founders back in 2001. The Fathom merger saw combined revenue of the two companies more than double from $19 million to over $40 million in two years through organic growth alone, Robb said.

"The addition of VDI's multiple Russian development locations, combined with the new but rapidly growing Ukrainian operations of both EPAM and VDI, represents not only the largest resource pool available to European clients, but far and away the most balanced distribution of resources across CEE countries," said Robb.

Within the Western European markets, EPAM was already established as the number one "near-shore" provider, Robb noted.

In January 2006, for the second consecutive year, EPAM was ranked first in a list of top IT outsourcing providers in Central and Eastern Europe, according to the "Global Services 100" list compiled by neoIT and CMP-CyberMedia's Global Services Magazine.

Founded in 1993, EPAM maintains its North American headquarters in Lawrenceville, New Jersey and its European headquarters in Budapest, as well as support and delivery operations in the U.K. and Germany. EPAM software development centers are located in Russia, Belarus, Ukraine and Hungary.

EPAM's customer base includes Reuters, the London Stock Exchange, Colgate-Palmolive, British Telecom, CareFirst BlueCross BlueShield, Schlumberger and Halliburton, in addition to technology leaders such as SAP, Hyperion, BEA Systems and Microsoft.

VDI, on the other hand, has more than eleven years experience in partnering with technology providers like Microsoft, IBM and Hummingbird, as well as with vertical corporations such as Nesté and Mars.

On the way up

The new merger makes EPAM the only company with significant development capacities in Hungary, Russia, Belarus and Ukraine, opined Robb. And according to EPAM, VDI is one of Russia's top-five software outsourcing vendors.

"[This provides] all of our clients with unmatched access to the best resources across the entire region, and also the most effective risk mitigation against potential localized inflation, resource shortages or geopolitical risks - all of which are considered critical issues by the largest clients when determining which global vendors to work with," he said.

On Feb. 1, 2006, EPAM announced that investment capital firm Siguler Guff & Company had made a "significant investment" in EPAM.

"[EPAM's] organic growth during the last five years has put them in a regional leadership position at a critical juncture when Central and Eastern Europe has gained visibility, reputation and market share on the global services market," said Drew Guff, managing director of Siguler Guff & Co. "We hope to accelerate EPAM's growth by fully capitalizing on opportunities for regional consolidation."

Robb said that the involvement of Siguler Guff is also related to EPAM's plan to make an IPO on a stock exchange in its bid to grow further.

As to which stock exchange, increasingly tight regulations associated with listing are making it too difficult to say for the time being, Robb explained.

"We're gearing up for an IPO and evaluating which market is the best. The decision on timing and the location of the market is an imminent business decision," he said.

As the number-one provider of software engineering outsourcing services in Central and Eastern Europe, Robb added that EPAM plans to consolidate its position through both organic growth and acquisition.

"We're looking to buy companies with a similar business model to ourselves to increase our development capacity. There are lots of smaller companies that would benefit by being part of a larger organization," Robb revealed at the time of the Siguler Guff investment.

Regarding Hungary, Robb said that he believes the country plays a role in complex development projects that benefit from proximity and ease of travel, and is particularly well suited for business analysis and project management for clients from the EU that have developments underway in Russia, Belarus or Ukraine.

"Hungary does have a lot of experienced senior people, many of whom have gained experience on large projects both in Hungary and in the West," Robb said. "They have a very good ratio of cost to skill and value."

He pointed out, however, that salary expectations are way out of line with the other CEE countries when it comes to workers occupying the lower rungs of the ladder of experience.

"Unrealistic expectations regarding compensation are further exacerbated by the Hungarian tax system, which presents a bigger burden by far than the tax regimes of any of our regionally competitive countries," Robb said.