A dull market is considered to be the best time for acquisitions. This, to a large extent, could explain Tech Mahindra’s two back-to-back acquisitions in less than a month. The company acquired 100 per cent stake in telecom BPO player Hutchison Global Services for $87 million (about Rs 470 crore) in the first week of September 2012. Within three weeks, the company announced that it has picked up a 51 per cent stake in Bharti Enterprises’ promoted Comviva Technologies.
Comviva happens to be the third investment of Tech Mahindra in calendar year 2012. It had invested Rs 35 crore for a minority stake in Dion Global, a financial market software firm.
Besides it being a good market for acquisitions, British Telecom (BT) selling its stake in Tech Mahindra may also have been a reason for the company to go aggressive with its acquisition strategy. BT’s say in Tech Mahindra’s operations could have reduced with its holding in the company to 9.1 per cent after it sold 14.1 per cent stake. Over the next three-five years, BT will no longer be Tech Mahindra’s top client. KPN Royal Dutch Telecom, which signed an international partnership agreement with Tech Mahindra, is expected to become its largest client.
As for Comviva, Tech Mahindra will make an upfront payment of Rs 125 crore out of the total acquisition cost of Rs 260 crore and the remaining will be made over the next five years, subject to certain performance parameters. Comviva is a mobile value added service (VAS) provider, which will add value to Tech Mahindra’s existing offerings in the mobile product space and diversify its service portfolio.
Comviva has annual revenues of $70 million (Rs 380 crore), which has grown at 15 per cent a year over the last three years, and an operating margin of 15 per cent. Its products are deployed with 130 service providers and banks across Asia, Africa, West Asia, South America and Europe. The acquisition will add around three to four per cent to the company’s revenue. Its top 10 clients account for 85 per cent of its sales. The Hutchison acquisition will result in committed sourcing revenues of $845 million over the next five years.
Tech Mahindra has set itself an ambitious target of achieving combined revenues of $5 billion (Rs 27,000 crore) by FY15, which is more than twice its current combined revenues (post-merger of Mahindra Satyam). This implies that the company will have to grow at a compounded growth rate of nearly 28 per cent. And the only way to reach it will be through more acquisitions.