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.