Cognizant's acquisition to put pressure on cash-rich IT firms

Buying cloud technologies imperative, as these are expected to account for 20% of incremental revenues of top 5 IT firms

Cognizant Technologies on Monday announced the acquisition of TriZetto Corporation for $2.7 billion. The deal is possibly the largest by any IT services company in the past five years, claim analysts, but it might not be the last. The acquisition has been driven by the company's desire to strengthen its healthcare vertical and acquire capabilities in SMAC (social, mobile, analytics & cloud) technologies. Even though acquisitions have been prevalent in the sector, Cognizant’s aggression could soon be replicated by the other big boys in the industry too. Macquarie Research says this deal will put pressure on some of the laggard players to use their balance sheet to pursue inorganic growth.

India’s technology service industry is at the cusp of a digital revolution and the top five technology services exporters need to bolster their capabilities in emerging technologies like social, mobile, analytics and cloud. Another factor that is apparent is the focus on select verticals. Cognizant’s acquisition of TriZetto highlights its ambition in the healthcare vertical. Cognizant’s revenues from the healthcare vertical will cross $3 billion after the acquisition. Edelweiss Securities says the company expects incremental revenue of $3 billion over the next five years from this acquisition, which will start accruing from calendar 2015 and ramp up gradually.

Another big take-away from this deal is that the IT industry is at the cusp of a digital revolution and many more companies will have to scout around to acquire capabilities and platforms that can help them grow non-linear revenues. Cognizant has paid four times TriZetto’s 2013 revenues ($676 million), which is not exactly cheap. Cognizant's conveyed to analysts that the transaction was undertaken in light of the growth in SMAC technologies and opportunities presented by ObamaCare.

  Here’s why cloud is important. Cloud-related services are expected to account for 20 per cent of incremental revenues of the Top 5 IT companies over FY14-17, says Standard Chartered Securities. The brokerage says companies which are late in developing cloud services could be at risk in potential vendor consolidation as cloud adoption becomes mainstream. Also, the evolving nature of cloud implies low entry barriers; the gap between the cloud revenues of offshore players and global majors is much lower than the differential between their overall revenues, adds Standard Chartered Securities.