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.|
|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.|
|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|
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.|
|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.
The 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.