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Cover Story

Let There be Synergies
Indiaís it Story so far was that of a few big players and a number of smaller ones. Now itís time that some M&As Balance this Anomaly out
Issue Date - 18/08/2011
It has long been said that the Indian IT/ITeS and BPO sector is quite prone to M&A activity. For the IT/ITeS sector, the reason is that it has traditionally been akin to a comet with a small head and a long tail. Apart from the top few companies that steadily moved up the value chain and also build differentiated vertical expertise particularly in BFSI, a large part of the sector has traditionally thrived on pricing. That advantage has steadily eroded with other software destinations like Vietnam, China, et al coming into the picture; and this nightmare is particularly real for the BPO sector. In fact, they are also competing with home countries. This year, UK-based firms Aviva, BT, Santander and New Call Telecom decided to move their centres back to the home country citing rising joblessness there, the need for an onsite model and also the rising costs in India. Moreover, with the issue on visas wherein US lawmakers have passed norms restricting H1B visas to Indian companies and also hiked visa fees by around $2000, the cost of doing business with the main market Ė the US is steadily going up. In the subsequent negotiations over handling this row, US is looking for more Indian companies to hire overseas, and this is another trend that could significantly alter the cost model. There are further problems for them back home, as the STPI tax benefit was not renewed this year. For smaller IT players, margins are typically at around 15% and they may find it hard to survive.

Finally, the uncertainty in the global environment persists, and is particularly riskier for IT companies that are heavily dependent on exports. Some impact has already been seen on larger firms as the Q1 results indicate. Infosys Technologies saw net revenues of Rs.74.85 billion in the first quarter, a growth of 3.2% qoq while EBITDA declined by 6.4% qoq to touch Rs.21.76 billion. The guidance for the second quarter USD revenue growth has analysts somewhat concerned as it is just 3.5-5%; considering that the quarter is normally the strongest for the company. Wipro reported a drop in Q1 net profit by 2.9% qoq to record Rs.13.35 billion and revenues jumped by 3% qoq to Rs.85.64 billion. While Infosys has talked about the risk of reduced client spending, TCS (even though its results were better) and Wipro have admitted that they are facing an uncertain environment apart from currency fluctuations. Smaller players could be under serious distress in the coming months as a global slowdown begins to take shape.

There is not much expectation of deals happening from the larger MNC players. The key rationale for these deals would be access to the Indian market. For instance, GroupOn acquired for an undisclosed amount early this year. The leading deal in the first half of this year was Sercoís acquisition of BPO giant Intelenet Global Services for $634 million. The latter had access to clients in UK, US and India. Otherwise, in the software space, with global IT giants having set up shop in India, there is little they can gain in terms of price/portfolio/market advantage by acquiring smaller Indian software firms. Girish Vanvari, Executive Director, KPMG India, adds, ďMany companies are sitting on idle cash. There are not too many targets to acquire, and at the same time the valuations are high.Ē

Globally, technology M&As are happening across the board as companies look a ways to ride the next wave in IT services, software and the internet. When it comes to outbound deals by Indian IT firms, a surprisingly large number of small deals have happened, and the focus in this case, apart from acquiring an attractive portfolio, has been easier entry to a newer geography. Wipro acquired the global oil and gas technology business of SAIC earlier this year for $150 million. Other deals in the first half of 2011 include GenPactís acquisition of Headstrong Corporation for $550 million, Infosysí acquisition of New Zealand-based Telecom Corporationís Software Services Division for $3.9 million and Polaris Software Labís acquisition of IdenTrust Inc. for $20 million. In addition, there is plenty to gain for mid and small tier IT companies to merge since they do have complementary strengths to leverage. The first half of this year saw a major deal when iGate Corporation and Apex Partners completed their acquisition of 83% stake of Patni Computers for $1.21 billion. For iGate, this helps expand its reach beyond BFSI, which was Patniís Achilles Heel to insurance, manufacturing, retail and distribution. HCL Technologies, which made the $658 million acquisition of Axon Group, has also looked bullish and is looking for similar deals that provide it growth opportunities. And other IT companies would find it inevitable too. M&As are going to be a key ingredient of Indian ITís next leap forward, and there is no doubting that.

Virat Bahri           

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