Bangalore / New York: Personal computer maker Hewlett-Packard Development Co. Lp (HP) agreeing to acquire Electronic Data Systems Corp. (EDS) on Tuesday is likely to spark a round of consolidation in the technology outsourcing sector around the globe, as suddenly much-smaller rivals scramble to stay competitive.
Analysts say Infosys Technologies Ltd, Tata Consultancy Services Ltd (TCS), Wipro Ltd and Cognizant Technology Solutions Corp. may now be forced to look for buyouts to compete with a combined HP and EDS, and boost flagging profit growth.
“Businesses of companies like Infosys and Wipro are under pressure, as their rivals like IBM and Accenture have really learnt how to be competitive even in a sluggish economy,” said Avinash Vashistha, chief of outsourcing consultancy Tholons Inc.
“This merger, if it happens, will only make situation worse for them by creating a third competitor,” he said. “Now, it is imperative for them to make acquisitions to fill the gap in their services portfolio and get a global footprint. If they don’t go for inorganic growth at this stage, they will clearly be at a competitive disadvantage.”
If HP is able to buy tech outsourcing firm EDS for $12-13 billion (Rs50,640-54,860 crore), it would vault it to a close second to IBM in such services. HP has long considered an acquisition to beef up its tech services business, a sector that offers relatively stable income and high margins even in an economic downturn.
Worldwide computer services revenue rose 10.5% to $748 billion in 2007, according to market research firm Gartner Inc. IBM was the leader, with a 7.2% market share. EDS weighed in at No. 2, with 3% of the market, while HP was No. 5, with a 2.2% share.
Analysts say Indian outsourcers, already battling slowing profit growth due to a slowdown in their main US market and rising cost of home operations, may now seek buys in the US and Europe to boost growth.
While all four big Indian services firms missed market estimates for net profit last quarter and issued cautious outlooks, International Business Machines Corp. (IBM), and Accenture Ltd reported better profits and raised their guidance.
India’s cash-rich IT services firms have so far restricted themselves to smaller buys as their businesses were growing rapidly and they were wary of integration issues.
But analysts say things may change soon as they look to add new service lines, strengthen marketing muscle and add large clients in new regions.
Last year, talk circulated that Infosys, which has a market value of $24 billion, or smaller rival Wipro may bid for Europe’s biggest IT firm Capgemini, but all the companies denied the rumours.
“Indian firms may not be able to digest a large firm, but they are certainly focused on small and mid-sized firms to gain access to some specific service lines where they have not been able to make a big mark,” Vashistha said.
“They have no chance to do that and compete with players like IBM, Accenture, and possibly combined HP and EDS, organically.”
The big Indian IT firms are not considered easy takeover candidates themselves. Wipro and Satyam are family-controlled, while TCS is majority-owned by the Tata group and Infosys is controlled by a group of founders. Reuters