SQS acquires in Austria

Anglo-German IT services company SQS has acquired Austrian IT company Triton for €4.4m up front in cash with a potential €11.1m deferred in cash and shares over the next two years. Triton, which is particularly strong in the insurance sector, reported profits of €1.4m on revenues of €4.8m for calendar 2006 and employs some 35 people. SQS successfully acquired Cresta, the UK's leading software testing consultancy last year but, to our mind, this acquisition is slightly different in that Triton is not a pure play software testing consultancy. Whilst this presents SQS with the opportunity to cross selling testing services into the Triton client base, some may have preferred to see the company's M&A strategy remain firmly focused on pure play testing consultancies. Nevertheless, the acquisition looks to be usefully earnings enhancing - we note that Altium has increased its 2008 EPS estimate by around 10%.

Our view

After a tricky period in the latter part of last year, SQS shares have come through strongly in 2007 - rightly in our view. The company has a differentiated offering in the market and, whilst a minnow in the broader IT services market, is a leader in its niche. This, we believe, should deliver sustainable competitive advantage over the medium and long term and justifies a valuation premium over more broadly based IT services companies. Our only concern therefore, is that SQS does not dilute the core offering too much with acquisitions that, whilst they may be financially compelling, arguably weaken the clarity of the service offering and potentially the investment proposition to the City.