Infotech M&A valuations up 95%

Local firms show willingness to pay higher valuations.

This is just another testament of the domestic infotech sector starting to dominate the global stage.

In the spate of mergers and acquisitions announcements in the last eight months, the one key aspect emerging is that there has been an increase in the deal value by 95 per cent, on an annualised basis and the average deal size has almost doubled compared to the same period in 2005.

What's more, the average revenue multiple (purchase consideration to revenue) for all deals where Indian companies have been the acquirers (both domestic and outbound deals) have increased from 1.12 to 1.84.

This shows the changing mindset among Indian IT companies, their willingness to pay higher valuations for acquiring strategic businesses and their own confidence that combined integrated businesses will meet significant success and yield them considerable returns over a period of time.

According to Grant & Thornton India (GT), an advisory firm, there have been 57 M&A deals in the first eight months of 2006 in the IT & ITeS sector valued at over $1.73 billion compared with 80 deals valued at $1.33 billion in 2005.

With the Indian companies trampling all over the world, the outbound cross border deal value increased by close to 200 per cent on an annualised basis with the average revenue multiple has increased from 1.15 to 1.87.

Explaining this upswing, GT India said that since the core business fundamental of IT sector lies in international business, exports, outsourcing and offshoring, this sector has seriously adopted the strategy of establishing a global footprint through inorganic growth.

"This has been the reason why more and more IT companies in India are making cross-border acquisitions and consistently increasing their acquisition sizes. There have also been several domestic deals (Indian companies acquiring other Indian businesses). There have been some significant inbound acquisitions as well where global IT leaders such as Oracle and EDS have acquired controlling majority stakes in fast growing Indian IT companies like iflex and Mphasis respectively," said H V Harish, Partner, Corporate Finance, GT India.