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Gold Chips

Finance New Europe – by Michael Stein

Consolidation in the region's it sector resembles a high-stakes Game of musical chairs. Recent consolidation activity in the sector provides a glimpse of a rapidly changing landscape

In the fast moving world of central Europe's high-tech sector, trying to fix the fifty fastest growing companies onto a list might seem like an impossible task. Just as in photographing an object moving at high speeds, what you see when you click the shutter will be completely different when you lift up your head for a second look.

Having established the Technology Fast 50 survey in the region in 2000, this is precisely the task Deloitte has set itself. The company takes what amounts to a snapshot of the region's technology sector, providing a stable picture of the state of an industry more commonly associated with constant motion.

Clever and quick

According to the rankings, Czech IT company Cleverlance was the second fastest growing tech firm in the region, posting growth of 2,933% between 2000 and 2004. What helped was the company's merger with Brnobased software company Brainsystems. Now operating as a single company under the name Cleverlance, the integration process is near its conclusion, according to Jakub Dadak, former CEO of Brainsystems, who now serves as integration manager at the combined company.

In a market with a constantly shifting landscape, Cleverlance is one of many companies working to maintain their high position, as well as to take advantage of growth opportunities - both in the rapidly expanding domestic market and those further afield. According to sales director, Jiri Biba, further expansion is already in progress, "Our focus is now on Slovakia, where we have opened a daughter company."

Mr. Biba further stated the benefits the merger provides, "Firstly, Cleverlance now has comprehensive know-how and tools for the Model Driven Engineering approach for integrated front-end solutions and business processes that really make business models and SOA (service-oriented architecture) work out their expectations. Secondly, we now have a set of business-oriented application frameworks (such as portals, publishing and content management systems, sales force and marketing campaign automation, etc.) that enable us to deliver business applications more effectively."

There are some general concerns which factor into much of the M&A activity in the industry, concerns that Cleverlance had on its collective mind before the merger. As Mr. Biba explained, "Business models and SOA on their own fail to meet the business and IT management expectations for flexible and low-cost IT systems development and modifications."

Skewed by Siemens

If the Slovak presence on the Fast 50 appears significantly smaller next year, it will in a large part be due to the recent activities of German electronics giant Siemens, which recently acquired a slate of leading companies in the country. In February 2005 Siemens got its hands on 100% of the shares of ELAS and HT Computers, integrating them into its Siemens Business Services umbrella. HT Computers had been the country's second largest IT service provider, and had even previously surpassed Siemens Program and System Engineering due to a one-shot order to supply Slovakia's "Computers for Schools" program.

ELAS, a solution-oriented IT company, was ranked seventh in the 2005 Fast 50, showing a four year growth of 1,070%. Prior to joining Siemens, the two companies had achieved sales of over EUR 54 million. The acquisitions added an additional 270 employees as well.

Most recently, in May 2006, Siemens announced that it had become the sole shareholder of Business Global Systems (BGS). Established in 1991 BGS specializes in info-communication technologies based on the internet platform. With a turnover of SKK 301 (EUR 7.95 million) in 2005, 27% of which came from services, BGS showed a 46% rise from the previous year. Its 35 employees will be integrated into the communications division by July of this year, bringing the total number to 115.

Unlike its leading 24% share of the Slovak market of info-communication technologies and services for telecoms operators, Siemens has held a modest position on the market for info-communication infrastructures. In the face of a highly fragmented segment, the company is pursuing a strategy that it hopes will place it at the forefront of the consolidation taking place. According to Jan Papanek, technical director of the corporate communications division, the firm's market share was approximately 6 to 7%, with BGS holding a similar share. Upon announcing the acquisition, Mr. Papanek confirmed the company's intention to "win a 12 to 14% leading market share after integration."

Joining forces

Two standouts on previous league tables have combined to become one of the most active IT players in the region. Formerly known as Comp Rzeszow SA (29th place on the Fast 50 in 2004), Asseco Poland and its Slovak partner Asseco Slovakia (formerly Asset Soft) are positioning themselves to compete regionally against multinational powerhouses like Hewlett-Packard, IBM and Oracle. The companies have functioned as suppliers of IT solutions, technologies, and services for financial institutions, the public sector, and commercial companies in their respective markets.

In September 2005 the group took on the Asseco name, declaring their strategy of expansion throughout CEE. The process began in November 2004, when the Polish company acquired 55% of today's Asseco Slovakia for SKK 440 million. With Asseco Poland focusing on consolidating its position on that country's market and pursuing expansion into Russia and the Ukraine, the Slovak partner takes responsibility for the other Visegrad countries. In the midst of preparing for a debut on the Warsaw Stock Exchange projected to occur in the middle of this year, Asseco Slovakia declined to provide information for this article, but it has already commented that the IPO proceeds will go towards expansion into the Czech Republic. A move onto the Hungarian market is also a likely possibility.

In deals already accomplished, Asseco Slovakia became the majority shareholder in Slovanet in December of 2005. An alternative telecoms operator, Slovanet's turnover for the first three quarters of 2005 was SKK 311.3 million, a 22% increase on the same period the year before. With the support of Asseco, Slovanet is planning a 2006 turnover of SKK 530 million. These revenues will add to the Asseco group's overall expected net profit for 2006 of SKK 296 million, following 2005's figure of SKK 240 million.

Unlike many of its competitors Asseco shuns a centralized company model, preferring to trust in group members' knowledge and experience of their own domestic markets and client base. In the case of Slovanet, the telecoms company will retain its original name and logo, and its management and expansion strategy should remain the same.

The Polish enterprise resource planning (ERP) market is another hot area for the ever-hungry Asseco. With its PLN 29.5 million (EUR 7.45 million) purchase of 96% of ERP specialists Softlab Trade and Softlab, Asseco Poland has moved into a strong position on a rapidly growing market (approximately 20% yearly). Also, in January 2006 the company bought 70% of the shares of WAPRO, a business software developer for SMEs, for PLN 13.3 million.

Acquisitions home and abroad

The Hungarian IT market is certainly no stranger to consolidation. In March 2004, EPAM Systems, a global provider of software services and solutions, announced a merger with Budapest-based Fathom Technologies, a software engineering firm specializing in advanced Enterprise Java Beans (EJB) the Microsoft Web services strategy, .NET. The combination of Fathom's 160 employees with the 600 working for EPAM in the US, Russia and Belarus made it the largest software engineering services provider in CEE. The parent company operates under the EPAM Systems name, and in the two years after the merger the company has more than doubled in size, currently employing more than 1,600 people.

EPAM's CEO, Arkadiy Dobkin, sang the benefits of the merger, citing both the added scalability to EPAM's production capabilities as well as the stronger EU presence it brings. Together with the recent additions of new locations in London and Frankfurt, along with two new offshore development centers in Russia and one in Ukraine, the merger with Fathom is a small part of a much wider global strategy. The company's expected revenues for 2006 exceed USD 60 million. "Clearly, it is natural for us to seek further expansion in central and eastern Europe, in line with our strategy, but we would also consider other locations with the right fit, specifically in the regions [North America and western Europe] where our clients are concentrated," Mr. Dobkin explained.

The reinforcement of EPAM's

presence on the EU market is a direct response to the needs of its European client base. According to Mr. Dobkin, the benefits include, "access to specific business knowledge (which is critical for the complex software engineering projects that EPAM undertakes), better structured requirements analysis and risk management, on-site project support and a more transparent communication structure within the projects. The truly onshore component coupled with a strong geographical presence in the EU has helped EPAM deliver much more complex, mission critical solutions to our demanding clients and differentiate ourselves."

In September 2005 Kirowski, Hungary's market leader in digital marketing, media and e-business services, became part of the international digital communication agency network Isobar. Ranked 12th on Deloitte's Fast 50 in 2005 and showing overall growth from 2000 - 2004 of 487%, it stands as one of the better examples of regional startup success. Kirowski's local and international clients include Hungarian Telecom, MOL, Nestle and Renault.

Isobar, the full service digital marketing network of Londonbased marketing services provider Aegis Media, hasn't confined its CEE activities to Hungary, having also acquired the leading Polish full service interactive agency, HYPERmedia.

According to Tomasz Sucheta, HYPERmedia's strategy director, joining the Isobar network and having access to the expertise of the Aegis Group will allow his company to compete with larger, international agencies and participate in more international projects. HYPERmedia was the first Polish company in its field to win a global client - camera manufacturer Konica Minolta Holdings, for which it are responsible for the creation of websites and online communication standards for 40 countries.

Rapid growth on the domestic market is yet another compelling prospect. "The development pace of the Polish interactive market is enormous and this is most apparent in the e-advertising sector," Mr. Sucheta explained, "According to recent data from Interactive Advertising Bureau, in 2005 online advertising expenditures in Poland rose by approximately 60% compared to 2004. It is highly probable that 2006 is going to be even better."

From the time you start this article until you reach its end the picture of the region's IT sector will likely have changed again. The game won't go on forever, but for now it's a good idea to keep your eyes on the action.