Capita's acquisition of IBS is ruled anti-competitive...

The Competition Commission (CC) has provisionally concluded that the completed acquisition by Capita of IBS could damage competition in the market for the supply of revenues and benefits (R&B) software to local authorities in the UK. This will have come as no surprise to regular readers of this blog, nor will the CC’s decision that there are no similar concerns in the Social Housing software market.

Christopher Clarke, Inquiry Group Chairman, commented:

“This merger combines two closely competing suppliers of revenues and benefits software to local authorities, leaving only one other supplier actively competing for business. In a stable market with little prospect of entry by new suppliers, our provisional conclusion is that the enlarged Capita revenue and benefits business will be able to take advantage of the lack of competition, for example by increasing prices or reducing levels of service to its customers.

We consider it likely that the adverse effects of the merger will have an impact on all customers, whether they are in the process of tendering for new revenues and benefits software or already have a contract for such software in place.”

Given the remit of the CC, this decision was expected, but I still regard it as disappointing, given the nature of the small and declining market for R&B systems. By not giving the CC a wider remit, Government has, I believe, missed a great opportunity to put in place protection for the interests of existing & future IBS users, and possibly even some safeguards for other Capita R&B customers.

But now the decision is made, and the discussion of remedies commences. It would appear that the CC is unlikely to agree to “behavioural remedies” such as price controls or Capita’s maintenance and ongoing development of two R&B systems in parallel. Rather it is looking at the feasibility of splitting off just IBS’s R&B business (from the social housing part) and its viability as a stand-alone business unit, or whether a divestment of the full IBS business is required.

The CC is also looking for the views of potential purchasers of the IBS business (full or R&B only) and constructive suggestions for other remedies, behavioural or structural – although I doubt that there will be any serious suggestions in this latter area.

All parties have been requested to provide any views in writing, including any practical alternative remedies they wish the CC to consider, by 20 April 2009. The CC states that its findings may alter in response to comments it receives on its provisional findings, in which case the CC may consider other possible remedies, if appropriate. – but I’ll be surprised if they stop short of divestment.

Given the current position, it seems as if divestment is the preferred route, but of what, to whom, and for how much?

As I understand it, the CC will have considerable control over any divestiture, deciding on the form of the business to be divested, setting a timetable (typically 6 months), vetting/approving potential purchasers, and generally overseeing the divestment through to completion. I can think of at least two potential, serious bidders who will no doubt be knocking on CC doors over the next few weeks......