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Indian firms eye fast-growing European outsourcing

Indian firms eye fast-growing European outsourcing
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First Published: Tue, Aug 07 2007. 05 18 PM IST
Updated: Tue, Aug 07 2007. 05 18 PM IST
Frankfurt/Bangalore: Indian software and services companies are on the prowl for overseas acquisitions, especially in Europe, as a stronger rupee and a skills shortage cramp their style at home.
Aided by large market capitalisations and huge cash piles, firms such as Infosys Technologies and Wipro are looking to strengthen their marketing muscle and add large clients in new regions as the outsourcing trend gathers pace beyond its English-speaking core market.
Indian IT services companies rode the first wave of outsourcing growth, helped by a large pool of English-speaking recruits and low wage costs.
But growth is slowing, because the rupee has risen nearly 7% against the dollar in the June quarter, and wages are soaring as firms struggle to find skilled staff.
Europe now has the strongest outsourcing growth in the world.
The value of new outsourcing contracts offered by European companies rose 78% in the first half of 2007 to 12.3 billion euros ($16.8 billion), according to outsourcing consultancy TPI, accounting for more than half of such deals signed globally. Global growth was just 6%.
Slow to catch on
Europe’s biggest IT firm, Capgemini employs more than four fifths of its 75,000 worldwide staff in Europe, including some 5,137 in central Europe, and has a large outsourcing centre in Poland.
“For a long time, Europe was slow to catch on to outsourcing compared with the Anglo-Saxon countries, but now it’s catching up,” TPI senior adviser Friedrich Loeer told Reuters.
Against this background, M&A deals by Indian companies are picking up in size and number, more than doubling in value to $15.26 billion and recording 108 deals in the first half of this year, according to data from Dealogic.
So far, most of this is accounted for by Tata Steel’s $12.9 billion acquisition of Anglo-Dutch steelmaker Corus in January.
But Tejas Doshi, an analyst with Mumbai brokerage Sushil Finance, says Indian IT services firms should now leverage the cash on their balance sheets. “You will see a lot more acquisition deals now than you have seen in the last three years.”
Infosys, with a cash pile of $1.6 billion and market capitalisation of $28 billion, has so far contented itself with small deals such as last month’s $28 million agreement to buy three back-office centres in India, Poland and Thailand from Philips Electronics.
Talk also circulated that Infosys may bid for Capgemini, but both companies denied the rumours.
Infosys Chief Financial Officer V. Balakrishnan told Reuters, however, that the company’s emphasis might soon change.
“The European market is very good because incrementally we are seeing more growth in Europe than in the U.S.,” he said.
“If we find some interesting opportunities there, which will enhance our presence in some of the countries like Germany and France, we will definitely look at it ... even if it is a large acquisition.” he added.
The head of Wipro’s European and American business also told Reuters in an interview last month that the company was aiming to secure a bigger slice of business from Nordic operators when they outsource their IT operations.
Need for scale
European IT services companies are cheap at the moment, relative both to historical performance and global rivals.
France’s Atos Origin, for example, trades at 13 times forecast 2008 earnings, according to Reuters Estimates, versus 22 times for India’s Tata Consultancy Services.
But European IT companies may need more small, synergy-seeking deals to reduce their cost base before they become attractive to buyers from other regions.
Momentum is already picking up, with Dutch telecoms group KPN agreeing to buy loss-making IT services firm Getronics and French IT service provider Steria buying British rival Xansa last week alone.
“Intra-European cross border M&A has accelerated and will likely be sustained by Indian IT services companies looking for a beachhead to European markets,” Credit Suisse analysts wrote in a July note to clients.
Immediate targets are seen as tier-two companies such as Atos as well as the captive IT units of larger companies such as Siemens’ SIS and Deutsche Telekom’s T-Systems, which are seen lacking the competence and scale required for a competitive market.
According to Atul Vashistha, chief executive of US-based consultancy firm neoIT, it will not be too long before larger IT services companies become prey for Indian rivals.
“As offshore players look to compete with the larger players for even larger deals and more higher end deals, the need for scale will drive them to larger acquisitions,” he says. “I expect one to happen in the next 12 months.”
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First Published: Tue, Aug 07 2007. 05 18 PM IST
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