Business Standard

IT sector steps up M&As

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Leslie D'Monte Mumbai
With organic growth slowing down due to the appreciating rupee and rising wages, Indian information technology companies have taken the acquisition route to add marketing muscle and win clients in Europe and the US.
 
In the last two years, Wipro was the one making news with acquisitions, that too small ones, mostly for less than $100 million. In the last two years, though, it has gone into an overdrive, acquiring 9 companies. What's more, its last, of Infocrossing, announced yesterday, may cost as much as $600 million.
 
Infosys too has swung into action, making only its second acquisition in 25 years, that of Philips BPO in Europe for $28 million. So has Tata Consultancy Services, the third of the triumvirate.
 
The information technology sector has struck acquisition deals worth Rs 3,500 crore since January 2007; the last two months alone account for over two-thirds of it. Of the 339 mergers and acquisitions from January-June 2007, the IT-enabled services sector accounted for 75 (a little over 22 per cent), according to advisory firm Grant Thornton.
 
Deals of all sizes are now in the offing. TCS is currently bidding for at least 150 deals in the financial space "" ranging between $30 million and $200 million "" which are in various stages.
 
Infosys Technologies is reportedly on the prowl to acquire small- and medium-business process outsourcing companies (BPO) that fit strategically with the operations of its subsidiary, Infosys BPO. It recently acquired after more than a decade.
 
A recent report by Avendus Advisors pegged the total value of acquisitions by Indian IT companies in Europe in 2006 around $500 million. This number, it states, is set to rise as more firms tap the $287 billion European market.
 
The reasons for choosing the acquisition route are many. First, the IT firms are sitting on huge pile of cash. As on June 30, Infosys had Rs 6,442 crore. And Wipro is sitting on a little over Rs 3,000 crore (not accounting for the Infocrossing deal).
 
Second, the acquisitions were "way overdue" as Pradeep Udhas, global head (sourcing advisory), KPMG, puts it. He adds: "These firms need an increasing global footprint to match the multinational IT firms. Acquisitions help in building capacities in terms of manpower and clients "" all in a short period."
 
Dhanraj Bhagat, Partner (Corporate Advisory Services), Grant Thornton, corroborates: "To maintain their double-digit growth rates, the IT firms have to expand and add product lines. Acquisitions provide a shortcut method."
 
Manpower accounts for almost 60-70 per cent of the costs that IT firms bear. Besides the acquisition cost per client can be much higher than getting readymade clients in a foreign country. "And even if the valuations are perceived to be high initially, the firms consider the long-term opportunity costs," reasons Bhagat.
 
Third, it helps the firms expand in a specific geographic location "" say the US, Europe or West Asia "" rather than start operations from scratch (the hassles of getting permissions, hiring employees, getting clients, etc. in a competitive environment).
 
And fourth, the acquisitions address niche areas. In Wipro's case, it will help the company expand its application, development and maintenance (ADM) and BPO offerings to healthcare clients. TCS is addressing the financial space. Kale Consultants acquired UK-based Zero Octa to enhance its presence in the travel and transportation segment there.
 
Finally, even clients gain in the bargain. Wipro, for instance, plans to pitch "offshoring rather than just outsourcing" to its newly-acquired clients from Infocrossing. This should help the clients in reducing their operation costs further.

 

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First Published: Aug 08 2007 | 12:00 AM IST

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