The Drive Behind US and India Outsourcing Acquisitions

It’s a race of a different kind. To keep the competition at bay, Indian IT firms are racing to acquire firms in Europe and the US to gain clients and customer experience, while big global IT firms are acquiring firms in India as well as expanding operations.

The buzz is globalization of services. Today, the IT services market has three American companies — Accenture, EDS and IBM — and three Indian IT firms — TCS, Infosys and Wipro — each vying with one another to gain the lead. In the last six months, Wipro, IBM and Accenture have expressed their aggressiveness by acquiring a total of 10 firms spanning from Germany to the US, from Australia to Chile.

Action in India

A closer look at some of the recent acquisitions by Indian companies throws light on which way the $600 billion industry is headed. While it’s important to have a large offshore capacity, it has to be supported by global delivery capability. The Indian IT firms are acquiring companies in the US and Europe to get clients (in a certain domain) and people (with actual client experience) to grow inorganically in the shortest possible time.

When you look at the way the market is expanding at this point, it’s imperative that these Indian companies continue to make acquisitions in the next 12 months to meet the numbers they’re projecting for the future. And with huge cash reserves, they can make significant inroads to compete with the top three global firms.

From the table below, you can see that Wipro has been particularly aggressive over the last eight months by acquiring six companies, even as Infosys and TCS remained mute spectators. Wipro has been pursuing this aggressive strategy to enhance its global presence and expertise. In fact, Wipro’s acquisitions weren’t meant to increase the numbers, but to build certain geographical footprints, particularly in Europe, where there’s huge potential for growth. Through acquisitions, Wipro is also looking at building domain expertise, acquiring intellectual property and patents and basically strengthening its consultancy skills.

 Table 1. India-based acquisitions.

 Acquirer

 Acquiree

 Mon./Yr.

 Sector

 Deal Size

 Location

 Revs.

 Empl.

 Infosys  Expert Information Systems  Jan 2004  IT  $24.3 mil  Australia  $34.6 mil  330
 Patni Computers  Cymbal  Nov 2004  IT services  $68 mil  US  $32 mil  500
 Subex Systems  Azure Systems  Jun 2006  Telecom  $140 mil  UK  $31 mil  NA
 TCS  Comicrom  Nov 2005  IT services  $23 mil  Chile  $35.5 mil  1,257
 TCS  Financial Network Services  Oct 2005  IT services  $26 mil  Sydney  $21.7 mil  NA
 TransWorks  Minacs Worldwide  Jun 2006  BPO  $125 mil  Canada  $256 mil  6,000
 Wipro  Saraware Oy  June 2006  Eng services  $32 mil  Finland  $18.8 mil  200
 Wipro  Enabler  June 2006  IT  $53.3 mil  Portugal  $39 mil  310
 Wipro  Quantech Global Services  May 2006  Eng services  NA  US  $12.7 mil  500
 Wipro  cMango  Feb 2006  IT  $20 mil  US  $13 mil  120
 Wipro  NewLogic  Dec 2005  Eng services  $59 mil  Austria  $17 mil  120
 Wipro  mPower  Dec 2005  IT  $28 mil  US  $18 mil  300

 

Yet, you shouldn’t assume that all is quiet on the TCS front since its last acquisition 12 months ago. TCS is increasing the offshore capability in newer accounts to 70% and intends to add 30,500 employees for the current year. It has already made offers to 9,200 fresh engineering graduates.

Though Infosys prefers to grow organically, the next acquisition may happen from the standpoint of consulting, strategy and geography.

Subex Systems, has been on an acquisition spree since 2004. It acquired Alcatel, Lightbridge and Mantas before it clinched the landmark deal of Azure Systems. Azure was acquired at $140 million, over three times the size of Subex itself. This lets it step forward in being a $100 million revenue operation by 2008-2009, and acquisitions would play a dominant role in such success.

Similarly TransWorks’ acquisition of Minacs Worldwide has given a leap to the organization to not only gain dominance, but also to enter segments in which it hadn’t ventured previously.

TCS needs to significantly enhance its BPO capability to service current and future clients. Organic growth won’t achieve the scale it needs in a short span. There’s a critical imperative for TCS to make a large acquisition that doubles or triples its existing BPO capability. Vertex seems to be a good fit for them in this direction.

Inroads by MNCs in India

While Indian companies are scouting abroad, EDS entered India through MphasiS BFL, even as Accenture expanded its Delivery Centre to nine and opened its fourth worldwide R&D Lab in Bangalore. Accenture’s strategy is to offer industry-defining outsourcing services and capabilities to serve a wide range of clients in each area of its outsourcing business. EDS, one of the largest firms doing IT infrastructure, applications support and maintenance, didn’t have a sizeable India presence. An acquisition had been in the cards for the last four years until it found the right match with MphasiS. The acquisition gives EDS access to 11,000 India-based employees skilled in advanced applications development, emerging technologies, BPO/CRM services and an applications development and business process services-focused sales channel. Now, EDS will use offshore as a “major offensive weapon,” giving the company a much needed push as a global IT services player.

Capgemini and Flextronics are also scouting India for acquisitions.

 Table 2. Deal sizes of global MNCs.
 Acquirer  Acquiree  Mon./Yr.  Sector  Deal Size  Location  Revs.  Empl.
 Accenture  Capgemini NA Health Practice  Jun 2005  Healthcare  $175 mil  US, Can  $171 mil  600
 EDS  MphasiS  Jun 2006  IT services  $380 mil  Mumbai  NA  11,000
 IBM  Micromuse  Dec 2005  App maint & dev  $865 mil  San Francisco  $160.8 mil  NA
 IBM  Ascential Software  May 2005  IT services  $1.1 bil  Westboro, MA  $271.9 mil  NA
 IBM  Equitant  Feb 2005  F&A BPO  $39 mil (approx)  Ireland  $11 mil (approx)  200
 IBM  Corio  Jan 2005  IT services  $182 mil  Armonk, NY  NA  200
 IBM  Daksh  Apr 2004  IT enabled  $140-$175 mil  Gurgoan  $60 mil  6,000

 

Beyond India

But, the buck doesn’t stop in India. Accenture and IBM have made four and two acquisitions, respectively, in the last six months, which aren’t in India. The large IT firms will look beyond India to look at the possibility of acquiring firms in China, Korea and Central Europe.

No doubt, India — and Bangalore, in particular — still remains a hot spot for most global firms for their offshore expansion. It’s no secret that Tier-2 countries like China, Hungary, Czech Republic and Brazil are fast catching up with India as clients are seeking low-cost offshore services. Even top Indian IT majors have set their foot in China on an experimental basis. The latest study by Gartner predicting that India will face a manpower shortage of trained and qualified people of 260,000 in the BPO space by 2009 adds fuel to the much charged environment.

 Table 3. Other deals by global multinational corporations.
 Acquirer  Acquiree  Mon./Yr.  Sector  Location  Revs.  Empl.
 Accenture  Meridian Informed Purchasing  Jul 2006  F&A BPO  UK    
 Accenture  Advantium  Jul 2006  F&A BPO  US  
 Accenture  Pecaso  Apr 2006  IT  Germany  $58 mil  300
 Accenture  Savista  Apr 2006  F&A BPO, HR  Wichita, KS    400
 Accenture  Media Audits  Dec 2005  Marketing  UK, Ireland, Netherlands, Germany, NY, Spain, France, Italy, Sweden  200
 IBM  BuildForge  May 2006  IT services  Austin, TX    
 IBM  CIMS Lab  Jan 2006  IT services  Roseville, CA  
 IBM  iPhrase Systems  Nov 2005  IT services  Bedford, MA    
 IBM  DataPower  Oct 2005  IT enabled  Cambridge    
 IBM  DWL  Aug 2005  IT services  Atlanta, Toronto    
 IBM  PureEdge Solutions  Aug 2005  IT enabled  Victoria, BC, Canada    
 IBM  Isogon  Jun 2005  IT services  New York    
 IBM  Meiosys  Jun 2005  IT services  Palo Alto, CA, Toulouse, France    
 IBM  Liberty Insurance Services  Nov 2004  Insurance  US    700
 IBM  Systemcorp  Oct 2004  IT services  Montreal    
 IBM  Venetica  Oct 2004  IT services  Charlotte, NC    
 IBM  Cyanea  Jul 2004  IT services  Oakland, CA    
 IBM  Candle Corp.  Apr 2004  IT services  El Segundo, CA    3,000
 IBM  Healthlink  Apr 2004  IT services, healthcare  Houston, TX  $66 mil  500
 IBM  Trigo Technologies  Mar 2004  IT services  Brisbane, CA    150

 

The Impact of Acquisitions

After the conclusion of a deal, the next obvious question is, does it make sense? What happens to revenue increase, valuation and margins?

First, let’s look at an acquisition from the company’s perspective and then from the stockholder’s perspective. From a short-term perspective, Wall Street will take the stand that EDS has acquired an asset that’s overvalued. Applying the matrix of growth, revenues and margin that you’d typically apply to US-based companies, I believe the deal was overvalued.

On the other side, Wall Street says EDS made a definite right move for the long run, as it now has a credible India presence. Having a sizeable offshore delivery capability was one of the biggest issues and challenges for EDS, which has been largely addressed by this acquisition.

A company faces at least two issues in large acquisitions: One is the financials of the company and the other is, how well can integration happen between teams from different cultures?

There are several small and large acquisitions we can watch for clues to the process. In fact, you might think that small acquisitions are fairly worthless. After all, they hardly make dents to the overall revenues, profits etc. of the acquiring firm. Through small acquisition, however, along with gaining access to niche capabilities and geographical presence, companies are energizing themselves with learning how to integrate different entities, across cultures and geographies.

Avinash Vashistha with TholonsThe real impact however, comes from large acquisitions — maybe not large compared to the overall company size, but definitely much larger than their in-house department or capability in that area. Tholons believes Indian firms will need to make large acquisitions of this nature in other geographies, to pose a significant challenge to the top US services firm, in the global arena.