Mumbai/Bangalore: India’s largest software services company by revenue Tata Consultancy Services Ltd (TCS) announced on Tuesday that it had acquired French information technology (IT) services firm Alti SA for €75 million (around Rs.530 crore), and analysts say more such acquisitions of foreign companies by Indian ones will happen this year.
Over the past few years, India’s top software companies have acquired foreign firms to increase their local presence in the US and Europe, their main markets, or to acquire employees with a specific skill set or strengthen their capability in a particular sector.
In calendar year 2012, the IT and IT-enabled services sector saw cross-border merger and acquisition transactions worth $1.4 billion (around Rs. 7,630 crore today) with a bulk of the deals happening in Europe ($640.4 million) and North America ($591 million), according to transaction advisory services firm Grant Thornton India Llp’s report Dealtracker annual edition 2012.
“Indian IT companies have thoroughly realized the value of making strategic cross-border acquisitions as demonstrated by Infosys Ltd’s acquisition of Lodestone, MphasiS Ltd’s acquisition of Digital Risk Llc and Wipro Ltd’s acquisitions of Promax, and we believe the cross- border activity is expected to increase in 2013,” said Arunkumar Krishnamurthy, partner (transaction advisory services) at Grant Thornton India.
TCS, for instance, has made 14 acquisitions till date, the largest being its purchase of Citigroup Global Services Ltd for $512 million in December 2008 to strengthen its business in the banking and financial services sector.
Most acquisitions by Indian IT companies have not been huge in valuation, but, instead, targeted at penetrating new geographies, especially Europe or adding a specific industry or particular skill set.
Chirajeet Sengupta, practice director at outsourcing advisory firm Everest Group, said, “You need a local presence, with a proper set-up and a local team in place, which is not the easiest thing to do. Indian companies are now increasingly starting to cross that hurdle. They are beginning to see better returns from Europe that is sustainable for the next three to five years.”
Ian Marriott, research vice- president at IT research firm Gartner Inc., confirms this trend. He said, “Targeting of acquisitions by Indian IT companies in the last 12 to 18 months have been more about getting a specific value than more generic acquisitions”
Analysts do expect the Alti acquisition to add around 1-1.5% to TCS’s annual revenue.
Infosys also saw higher dollar revenue growth sequentially in October-December quarter, including the revenue of Switzerland-based management consultancy Lodestone Holding AG, which it acquired in October 2012 for $349 million.
Its dollar revenue grew 6.3% sequentially, including the Lodestone acquisition that was completed this quarter; excluding the acquisition its revenue grew by 4.2%. Infosys also expects this acquisition to be earnings per share accretive.
Still, most of these acquisitions have been really small and get lost as they get absorbed, said an analyst with a foreign brokerage firm. This person, who spoke on condition of anonymity, singled out as an exception the 2008 acquisition of Axon Group Plc by HCL Technologies Ltd for £440 million (around Rs.3,655 crore today). That gave HCL new capability to implement large enterprise software projects.
“That business has done well for them over a period of time and driven growth,” said the analyst. “Both Lodestone and Alti acquisition seem to have been done at reasonable valuations, but beyond a point it’s not going to create any magic for them.”