IT's action time on Deal Street

The ICE Sector is on overdrive, and that fact was on full display in 2006

Many large IT players have shown they are ready to step on the mergers and acquisitions (M&A) pedal after periods of relative inactivity.

Independent estimates reveal that Microsoft, Cisco, IBM, EMC and Oracle combined have more than $50 billion in cash on their balance sheets which they can leverage for acquisitions. What better way than to invest in India or acquire Indian companies? So this is what they did in 2006.

Companies such as i-flex Solutions, MphasiS, Kanbay and OfficeTiger were in the thick of those being wooed by global majors such as Oracle, EDS, CapGemini and R R Donnelley.

Clearly there was growth in value but not in number of deals which is quite comparable to the previous year. For the record, this sector saw deals worth close to $2.5 billion during the year (till October, the figure stood at a little over $2 billion) "� almost doubling from 2005 levels of $1.3 billion.

The average deal size over the year has grown by 50 per cent. The two large investments in the IT & ITES sector were EDS's investment in Mphasis BFL for $380 million and RR Donnelley & Sons Company's investment in OfficeTiger for $250 million.

Said Rahul Bhasin, managing partner, Baring India : "It is difficult for these global majors to scale up without an Indian angle. This is increasingly getting reflected in the value of deals that is coming into India."

There are two clear trends emerging from these figures. One is the trend of the large international players such as EDS, IBM, Accenture, Oracle etc. wanting to grow big and scale up in India.

"They seem to be willing to pay significant value for mid- and large-sized operations. While there may not be too many other large players we could see the action shift to the mid sized players as the names mentioned above are keen to expand and will do so if there are opportunities and there area few other international players who are still to have a presence here," said H V Harish, Partner-Corporate Advisory Services and Head -South India, Grant Thornton.

The catalyst in some of the deals have been the private equity players. For example, Barings which had a significant 34 per cent stake in MphasiS brought in EDS which was looking at a significant scale in India. According to analysts tracking this sector, the PE angle would be a key driver of strategy for M&A in companies where they have significant stake.

The other trend is that of Indian companies wanting to go global. "Indian companies are now aggressively and increasingly doing global acquisitions but are doing it very carefully. Whilst transaction sizes are increasing and are quite large in the BPO sector, in the IT sector it remains primarily focused on either specific niche skills or geographic areas," added Harish.

The perfect example of Indian companies acquiring niche companies overseas during 2006 has been Wipro. This firm spent close to $225 million during the year to acquire capabilities in fields such as engineering design, retail, infrastructure management across six companies.

On the other hand, TCS, India's largest software exporter went on an overdrive in the BPO sector acquiring Chilean as well as London based firms commiting close to $100 million to acquire capabilities and skills in these geographies.

Commenting on the year ahead, Harish said this sector will see increased outbound deal values and probably one or two very large cross border ($400-500 million) deals in the BPO space by Indian companies.