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NASDAQ-listed IT-services provider Cognizant has lapped up 17 companies in seven years, spending millions of dollars on these acquisitions. This month alone, it acquired two companies - Equinox Consulting, a financial services consultancy in Paris, and ValueSource, the captive arm of Belgian banking and insurance services firm KBC.
Cognizant has acquired two to three companies every year over the last few years. However, contrary to what one would think, the contribution of these acquired companies to Cognizant's topline has not been more than 1-2 per cent in any given year.
So, why then is Cognizant acquiring new companies with such unfailing regularity?
Cognizant's Group Chief Executive (technology and operations) R Chandrasekaran says: "These acquisitions are to add strategic capabilities to the company, and are clearly not for growth or to build capacity". Over the years, Cognizant has grown at a significantly faster clip than industry peers TCS, Infosys, Wipro and HCL Technologies. The company has grown at an average rate of 28 per cent in the last five years compared to TCS' 16.2 per cent, Infosys's 13.2 per cent, Wipro's 13.2 per cent and HCL Technologies' 21.6 per cent. For Cognizant, the bulk of this growth has been organic, while acquisitions, called "tuck-under" by the company, have added strategic capabilities.
Driving force
Chandrasekaran explains, "Cognizant's acquisition philosophy is driven by three objectives: expanding the geographic footprint, filling in the gaps in its solutions spectrum and strengthening the company's domain, consulting or analytics capability."
In line with these goals, the company has made 17 niche acquisitions since 2007. US-based CoreLogic was acquired in 2011 to bring in mortgage processing expertise, while Invensys Operations Management was bought in 2009 to gain an entry into plant automation and industrial engineering expertise. Among its other acquisitions, marketRx has helped the company strengthen its sales and marketing analytics capabilities, PIPC, a company acquired in 2010, has given it large-scale programme management capabilities and Strategic Vision Consulting has helped the company acquire consulting expertise focused on the media and entertainment industry.
More important, the acquisitions have also come with the promise of new clients for Cognizant. For instance, marketRx has worked with all the top 20 global pharmaceutical companies and Strategic Vision Consulting had the top five global studios in Los Angeles among its clients.
Likewise, while the recent acquisition of ValueSource gives Cognizant an anchor client in Belgium, Equinox Consulting gives it access to some marquee names in the financial services industry in France and elsewhere in Europe, including investment banks such as Lazard and Rothschid, commercial banks like BNP Paribas, Credit Agricole, Societe Generale, and insurance and asset management companies like Allianz, AXA, CNP Assurance. "These clients should open the doors to several new clients for Cognizant," says Sara Gubins, research analyst at Bank of America Merrill Lynch.
A specific area of focus for Cognizant has been the captive units of companies in India and overseas. While many others in the industry have taken to this approach-TCS acquired the captive arm of Citigroup, Infosys bought out the captive arm of Philips, and Capgemini acquired the captive unit of Unilever-Cognizant has been the most active in this space. Its long list of acquisitions include the captive units of T-Systems, UBS and BNY Mellon, among others.
"We understand the value that captives bring to the table as we have seen both sides of the captive story," says Chandrasekaran. "We ourselves started as a captive of the Dun & Bradstreet Corporation and have incubated captives such as that for BNY Mellon." Integration of captive units has helped Cognizant retain domain knowledge, client processes, and cultural know-how, among other things.
In the last couple of years, the acquisitions have served another purpose in the company's business strategy. In addition to selling directly in Europe, Cognizant has used these new companies as a platform to gain a stronger presence in the continent. The non-English European market is becoming increasingly important to IT companies in India, including Cognizant, Infosys and TCS. While TCS and Infosys acquired one company each - France's Alti and Switzerland's Lodestone, respectively - Cognizant has acquired three companies: Galileo Performance and Equinox in France, and the C1 group of companies in Germany.
Europe bound
Viju George, IT services analyst at JP Morgan, says: "The European march of IT companies shows long-term thinking as there is growth in Europe over the medium-to-long term (about 3-5 years). The opportunities are huge as the region accounts for under 7 per cent of the export revenues of Indian IT services companies. The continent's big IT budget has been another draw. According to research and consultancy firm Gartner, Europe (not including UK) accounts for around 20 per cent, or $184 billion, of the global IT services spending of $905 billion."
To some extent, Cognizant's strategy to go in for small acquisitions has been driven by the desire to ensure smooth integration. Pradeep Udhas, a partner at KPMG, says small or niche acquisitions are easy to amalgamate, which has been a major challenge traditionally for any company. Besides, small companies are mostly promoter-driven and, therefore, easy to acquire.
Chandrasekaran adds, "Central to the Cognizant experience is the unique Cognizant culture. With our approach of capability acquisitions, we have been able to enhance our depth and sophistication in key markets while preserving our secret sauce of culture. With our 'one company, one culture' approach, we maintain the high levels of quality that our clients and associates expect-across services and geographies."
The company's strategy is clearly reflected in its growth. Last month, it revised its revenue guidance upward by two percentage points to 19 per cent revenue growth of $8.74 billion for calendar 2013. The industry on the whole is slated to grow at 12-14 per cent in 2013-14, according to Nasscom.
