Capgemini’s decision to acquire IGATE might be aimed at enhancing scale and capacity but in stark contrast, Indian IT services majors are seen aggressively buying technology companies to acquire new capabilities instead of acquiring traditional IT services capabilities. Experts say while the sector is expected to see some consolidation, acquisitions for new technologies, capabilities and skills are expected to see stronger momentum.
On Monday, Capgemini announced it would acquire Nasdaq-listed IGATE for about $4 billion, making it one of the biggest deals in the traditional IT services space. The acquisition is expected to beef the position of the French IT services and consulting firm in North America, apart from giving a boost to some of its offerings.
Such large acquisitions in the traditional IT services space are, however, rare. By comparison, IT services companies, especially those with Indian roots, are seen carrying out acquisitions aggressively, which they hope will help position them as dominant in new technology areas such as cloud, analytics, artificial intelligence and mobility.
“The merger of two largely traditional IT service providers is contrary to the trend of service providers hunting to invest in innovative cloud-powered digital-led start-ups,” equity analyst firm Motilal Oswal said in a note on Tuesday.
Another reason why experts believe consolidation in the traditional IT services business will not be very frequent is this space is becoming more and more commoditised. “Consolidation in the IT services space is of no meaning because you are only going down a path where the future is not bright. Even the merger of IGATE and Capgemini is not going to work the way they want because the IT services business is being commoditised,” said V Balakrishnan, co-founder and chairman of Exfinity Fund and former director and chief financial officer of Infosys.
“What will work for them is buying capabilities, acquiring companies which have got good intellectual properties, products or solutions to be able to offer differentiated services in the marketplace; that will be a winning game,” he added.
So far, some large consolidations in the IT services space have been driven purely from the point of view of acquiring scale, gaining access to large deals and new geographies and enhancing presence in new regions. When IGATE acquired Patni Computer Systems, a company three times its size at that point, the intent was increasing the potential of winning large deals, considered sensible at time. However, with clients’ focus shifting to new areas such as cloud and digital, large multi-year contracts are increasingly becoming scarce.
Instances of consolidation in the traditional IT services space include HP’s acquisition of EDS in 2008, which more than doubled the combined entity’s services revenue to about $38 billion, and Capgemini’s acquisition of Kanbay for $1.25 billion in 2006.
“This (Capgemini’s acquisition of IGATE) kind of an acquisition isn’t easy is quite rare. First, there are three-four buyers left that can think of such acquisitions. Companies such as Accenture and IBM are big enough in India,” said Girish Paranjpe, operating partner at Boston-based private equity firm Advent International.
“As far as Indian companies are concerned, I don’t think they will want to buy companies that are exactly like them. The story of Indian companies acquiring for scale is over,” added Paranjpe, formerly joint chief executive at Wipro.
In terms of acquiring new capabilities and filling technological gaps, Indian IT services companies or companies with a strong Indian lineage are driving the march. The recent acquisitions of Panaya and Kallidus by Infosys, and Trizetto, Odecee and Cadient Group by Cognizant are testimony to this.
“We believe the pace of mergers and acquisitions will continue, both in terms of consolidation deals and for acquiring different kinds of capabilities --- what Infosys has been doing in the recent past. However, in case of Indian companies, we will not see those acquiring pure traditional IT services capabilities, as they won’t see much value-addition in those deals,” said Ajit Deshmukh, director at investment banking firm Equirus Capital.
