Bangalore: Wipro Ltd has long prided itself on its acquisition strategy, which it calls “string of pearls” - an approach focused on buying several small companies that are a strategic fit.
That strategy remains, according to Suresh Senapaty, the company’s chief financial officer, although the acquisitions have got progressively bigger. In the past two months, Wipro has acquired Infocrossing Inc. and Unza Holdings Ltd for a total of around Rs3,450 crore. “Some of them (the pearls) are small, while others are bigger,” said Senapaty in a telephone interview.
Even as some analysts question the price at which Wipro acquired Infocrossing - $600 million (Rs2,436 crore) or $18.70 a share, which translates into a forward price-earnings multiple of between 36 and 43.4 - others say that Wipro has clearly opted to “buy rather than build” its business in some areas in an effort to quickly tap opportunities and compete with firms such as International Business Machines Corp. (IBM) and Accenture Ltd.
The forward price-earnings multiple is the number of times a company’s stock price is of its expected earnings per share. In Infocrossing’s case, earnings per share are expected to be between 43 cents and 52 cents for the year ending December.
“The company (Wipro) believes that it could have taken it about three years and around $300 million investment to build a business around the infrastructure management space,” said Pankaj Kapoor, who tracks technology firms at Mumbai-based brokerage ABN Amro Asia Equities. Apart from the time and money involved, the company would have also lost out on business as it did this. Instead, for $600 million, it gets a business on the go, complete with customers, 190 of them, five data centres in the US, and expertise in managing IBM mainframe computers, still used by large corporations, especially banks and other financial services companies.
The Unza acquisition achieves a slightly different set of objectives for a business that Wipro has always maintained is highly profitable in terms of return on capital employed. It gives Wipro a presence in Vietnam, Hong Kong, China, Indonesia and Malaysia (the company’s factories are located in all these countries). Apart from selling in these markets, Wipro also gets a low-cost manufacturing base for its Indian operations. And the revenues of its consumer care business have more than doubled to Rs1,600 crore from Rs680 crore.
The acquisitions have left Wipro with cash reserves of just around $150 million, down from $1 billion in June. Rather than keeping this money on its books, the company has chosen to put it to some use.
Wipro may also have paid around $100-150 million extra for Infocrossing, according to one analyst. “I believe around $450 million could have been an ideal price,” said an analyst at a Mumbai-based foreign brokerage who did not wish to be identified because of his company’s policy.