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European crisis presents buyout window for Indian IT companies

European crisis presents buyout window for Indian IT companies
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First Published: Tue, May 25 2010. 09 20 PM IST
Updated: Tue, May 25 2010. 09 20 PM IST
Mumbai: Economic turmoil in Europe and a weak euro have offered Indian information technology (IT) firms a chance to explore mergers and acquisitions (M&As) in that market and reduce their dependence on the US.
At least two large Indian IT companies are already looking to buy out European assets.
A senior executive at Infosys Technologies Ltd acknowledged the firm is looking at strategic acquisitions in markets such as France and Germany.
“We are looking at a strategic fit which will enhance our presence in Europe, get us access to large customers and provide us with more domain competency. Valuation is one part of the factors we look at,” Infosys chief financial officer V. Balakrishnan said in an email response to Mint. “But more than that we need to find a right strategic fit.”
Wipro Ltd also said the continent is on its acquisitions radar.
“Europe is an attractive market but it’s always been a question of getting the right asset,” said K.R. Lakshminarayana, chief strategy and M&A officer at Wipro Technologies, the IT services arm of India’s third largest IT services exporter.
Tata Consultancy Services Ltd (TCS), India’s largest IT services firm, did not comment.
Sector analysts agree the European crisis offers an opportunity for Indian companies.
“We believe that the current European crisis presents once again an opportunity for Indian techs to pursue inorganic growth opportunities to address the gaps in service/vertical portfolio after missing out on the same during 2008,” analysts at Emkay Global Financial Securities Ltd said in a 20 May report.
In the past few years, Indian IT companies have been trying to lower risk by reducing their dependence on the US, from where they get nearly 60% of their revenues. However, most companies are yet to establish a significant presence in the European outsourcing market outside the UK.
Also, most large acquisitions have been in the UK, such as HCL Technologies Ltd’s 2008 buyout of the UK’s Axon Group Plc, for £440 million (Rs2,992 crore today). HCL, India’s fourth largest IT services firm, did not respond to Mint queries.
On 21 May, British newspaper Daily Mail reported that Infosys is looking at a £2.9 billion deal to acquire UK-based IT services firm Logica Plc.
In separate responses to Mint, Logica and Infosys said they “do not comment on speculation”.
The ongoing debt crisis could translate into lower valuations. With better buying power of an appreciating rupee, it presents a second window of opportunity for most Indian IT firms that missed out on making major acquisitions in the US or Europe during the slowdown that started in 2008.
“We believe a risk-averse environment could keep target valuations low, while a weak GBP (pound) and EUR (euro) would make M&A more attractive for Indian companies,” said Abhiram Eleswarapu and Avinash Singh of BNP Paribas Securities India Pvt. Ltd in a 17 May report.
It also helps that most large Indian IT firms have strong balance sheets. Infosys, for example, had around $3.2 billion in cash at the end of March.
“Indian IT companies (especially Infosys) have strong cash positions. Therefore, we see 2010 as another chance for them to seek European acquisitions to gain access to a difficult market,” the BNP Paribas report said.
Indeed, TCS earns only around 10% of its total revenues from continental Europe, while Infosys gets around 15%. Wipro does not disclose its continental Europe revenues, excluding the UK.
“Culturally, Europe is a different ball game and Indian IT firms haven’t been much successful in tackling it organically,” said Milan Sheth, partner, business advisory services at consultancy Ernst and Young.
Industry observers also say that it is time Indian IT companies make large acquisitions to be able to tap into the next phase of growth.
“Organic growth can only take you so far,” said Abhijeet Ranade, associate director, technology advisory services, at PricewaterhouseCoopers. Pvt Ltd, adding that long-term growth would have to be through acquisitions and that Europe is a good opportunity at this point in time.
But such acquisitions may not be as easy, warns Sid Pai, managing director of the Indian arm of outsourcing consultancy TPI.
“Yes, the valuations will be lower, and the buying power of rupee is better, but are the potential targets in Europe distressed enough to sell just yet?” he said. “The question, then, is if the management at Indian IT firms have enough appetite to go out and make a hostile attempt?”
lison.j@livemint.com
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First Published: Tue, May 25 2010. 09 20 PM IST