Get 40% Off
These stocks are up over 10% post earnings. Did you spot the buying opportunity? Our AI did.Read how

ANALYSIS-Indian outsourcers shy of blockbuster M&A

Published 10/19/2009, 03:32 AM
Updated 10/19/2009, 03:39 AM

* Dealmaking could help Indian firms take on bigger rivals

* IBM, Dell, Cognizant expand offerings through acquisitions

* Indian firms set for nuts-and-bolts buys outside U.S.

* Companies shy of big deals; lack of risk-taking appetite

* Infosys, TCS shares double in '09 on growth view

By Sumeet Chatterjee & Anshuman Daga

BANGALORE/SINGAPORE, Oct 19 (Reuters) - In an industry where size matters, India's showpiece software services firms need to be bold and acquire firms or risk playing second fiddle as bigger IT players emerge as one-stop shops for cost-conscious clients.

Oracle and Dell have snapped up targets to grow beyond their core areas, while Xerox is buying Affiliated Computer Services for $5.5 billion to jump into the outsourcing sector.

By acquiring players with a wide client base, India's top three IT firms -- Tata Consultancy Services, Infosys Technologies and Wipro -- can leapfrog in size and clout, helping them win multi-million dollar deals.

So far, India's near-$60 billion IT sector has shied from blockbuster deals and instead focused on acquiring smaller IT divisions to tap opportunities in areas such as utilities and healthcare.

"For good measure these companies have been conserving their resources and as competitive pressure grows now is the time to fill up some of their skill gaps through acquisitions," said Ved Prakash Chaturvedi, managing director at Tata Asset Management.

India's top three IT firms each has a market value of between $18 billion-$27 billion and boasts a global footprint.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

These exporters individually employ about 100,000 staff, mostly in low-cost India centers with manicured lawns, pizza and Subway outlets, auditoriums, fitness centres and golf carts to move around the sprawling campuses.

IBM, Accenture and Hewlett-Packard have also expanded their India-based workforce, enabling them to move more of their overseas work to these lower-cost centres.

IBM stole a march in 2004 when it swooped on Daksh, an early local backoffice outsourcer, for $170 million, and now employs over 70,000 staff in India. Accenture has over 40,000.

India's two-decade-old IT sector already faces cut-rate competition from the bigger players and is struggling to retain experienced staff, usually lured away by global rivals.

"What might happen in the long-term is customers might work with large all-services-under-one-roof kind of vendors, which Indian vendors do not offer," said Gartner India's principal research analyst Diptarup Chakraborti.

Global clients are increasingly keen to partner vendors offering an array of IT services -- from managing complex computer networks and call centres to software coding.

Infosys and Tata Consultancy shares have doubled in 2009, versus a 45 percent rise in IBM and 19 percent in Accenture. Infosys trades at 20 times forward earnings versus 14 for IBM.

Firms such as Citibank, General Electric, BT, Ferrari and British Airways count on Indian firms to help keep their operations ticking.

This month, Infosys' improved outlook failed to cheer markets, suggesting a recovery will take time.

RADAR ON SMALL BUYS

For now, Indian IT firms are content with smaller buys.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

"Looking for strategic buys that allows them to play on the grand global stage, that's really the next step that these Indian companies are in the process of taking," said Mark Mayo, partner and president at advisory and research firm TPI.

Analysts see them as potential acquirers in Europe as local firms look to expand sales in markets other than the United States to cut their big exposure to the world's largest economy.

However, they are unlikely to be keen to swoop on large European IT players such as Capgemeni and Atos Origin due to the potential risks arising from adding large headcount to their existing base of low-cost staff.

Instead, they may be keen to buy Indian backoffice operations of banks such as BofA-Merrill Lynch and American Express. Firms that specialise in consulting or offer services to healthcare and energy firms are also targets.

Cognizant Technology last week bought the Indian backoffice unit of UBS for about $75 million.

Infosys, which walked away from a bidding war with a smaller local rival to acquire British IT firm Axon last year, has built up a cash pile of $2.8 billion and is now looking for buys to establish its presence in new markets and add new service lines.

HCL Technologies paid about 440 million pounds ($720 million) for Axon, marking the biggest overseas acquisition by an Indian IT firm.

Infosys CEO Kris Gopalakrishnan said: "Our focus on acquisitions is very different and that's a reason why we are looking at an acquisition typically 10 percent of our revenue -- that's about $400 million."

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

Cultural and integration risks associated with large M&A are also a barrier and Indian firms are unlikely to shed their cautious approach.

"They do not want to acquire a big-ticket player and maybe they feel the integration issues will be too tough a challenge to manage in the short to medium term," Gartner's Chakraborti said. (Editing by Ian Geoghegan)

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.