NEC buys KMD to fuel European services ambitions

NEC has joined the growing line of Japanese technology giants to launch an M&A offensive on the European software and IT services market, agreeing a DKR8bn (€1bn) deal for Denmark’s KMD.

The target company is Denmark’s largest supplier of software and IT services to the country’s public sector, and was originally established back in 1972, when Denmark's municipal IT centers were merged and KMD was given the mission to develop and manage IT systems that digitalize welfare processes for local government clients.

The move is very similar to NEC’s other significant recent move in Europe, which was the £475m (€538m) purchase of the UK’s Northgate Public Services (NPS) in January 2018. NPS was also under private equity ownership (Cinven), and brought a blend of proprietary systems and related implementation and management services.

KMD brings 3,200 employees, with revenue reaching DKR5.6bn (€750m) in 2017. The company makes the majority of its revenue from its proprietary systems portfolio that covers welfare administration in areas such as unemployment, pregnancy, and healthcare. It has also developed offerings to provide support in healthcare and education, and has a hosted SAP service for local government called KMD Opus. 

However, a key part of KMD’s strategy in recent years has been to diversify into the commercial sector (just over a quarter of sales), which has partly been driven by challenges on a high-profile project to implement a new “social pension” system, which resulted in it being hit with a DKR100m (€13m) penalty. PAC customers can find a full profile of KMD here.

NEC has talked up the potential for cross-selling between KMD and NPS, with both companies forming a new international spearhead for the group’s ambitions to build on a strong domestic platform of business in what it calls “public safety.” This covers a range of topics including digital government, city management, smart transportation and digital healthcare, and the company is aiming to turn this into a JPY200bn (€1.6bn) business, outside of Japan, by 2020.

NEC’s portfolio in the software and IT services space is a broad one. Domestically, it has a major systems integration and managed services business, but outside of its native region, it is a key player in the telecoms infrastructure software space through its acquisitions of Netcracker and Convergys, while it is also among the leading pack in terms of retail point-of-sale services, where clients include 7-Eleven. The group’s 2015 acquisition of Abeam Consulting is also leading its progress in the SAP HANA consulting and implementation market. 

Further takeovers are on the agenda. The company’s aim is to significantly increase its revenue from outside Japan and it has a JPY200bn (€1.6bn) warchest set aside for deals in its mid-term planning (in which the NPS and KMD moves have already made a significant dent). Note that the themes of artificial intelligence and IoT are front and center of the group’s over-arching “orchestrating a brighter world” strategy.

Europe has not been the sole focus for NEC’s international expansion. It already has a significant presence in the Australian IT services market through the purchase of CSG five years ago, and snapped up Brazilian IT security shop Arcon Informatica in 2017.

As with NTT Data, Hitachi and Fujitsu before it, the challenge will be for NEC to stitch together a fragmented group of international targets to create something that is at least the sum of its parts. We will watch its progress with interest.