Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday

Wipro puts cash to good effect as its acquisitions get bigger

Wipro puts cash to good effect as its acquisitions get bigger
Comment E-mail Print Share
First Published: Thu, Aug 09 2007. 12 48 AM IST

Updated: Thu, Aug 09 2007. 12 48 AM IST
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.
However, Wipro expects margins of Infocrossing to double to nearly 24% in three years, through improved productivity, moving work offshore to countries such as India and pursuing larger outsourcing contracts of over $300 million in size, said Senapaty.
Kapoor of ABN Amro said he expects the company to clock $419 million in infrastructure revenues by March 2009, lower than Wipro’s estimate of $500 million.
Irrespective of the price, however, the Infocrossing deal would help Wipro, said most analysts. “This helps Wipro acquire end-to-end capabilities and get closer to the customer,” said Gaurav Gupta, country head of Everest Group, a company that advises clients on software outsourcing.
Wipro’s rival Infosys Technologies Ltd last month said it was taking over back-office operations of the Netherlands-based Royal Philips Electronics, employing around 1,400 professionals in Chennai, Lodz in Poland and Bangkok in Thailand for $28 million, in return for a long-term contract of $250 million.
Infrastructure pie: Chief financial officer of Wipro Suresh Senapathy speaks during a press conference to announce the acquisition of IT infrastructure management company Infocrossing in Bangalore on Monday.
Only 15% of the $400 billion worth of information technology and back-office contracts are sent offshore to low-cost countries such as India, and “Infosys and Wipro are taking this way to address the larger 85% pie,” added Everest’s Gupta. The margins of Wipro would improve, said analysts, but they aren’t so sure about the company’s ability to manage a smooth integration of Infocrossing’s operations with its own, especiallly given past experiences with other acquisitions such as Nervewire Inc.
“Nervewire experienced what can be characterized as ‘teething problems’ a couple of years back—stemming from a combination of market conditions and cultural factors,” said Ashish Thadani, senior vice-president of research of the US-based Gilford Securities in a June interview with Mint.
However, Wipro has come a long way from the time it acquired Nervewire and “has learned a few lessons in managing cultural integration,” said Senapaty. “The entire management at Infocrossing will be retained, most of them are US nationals,” he added.
Assuming that Wipro is able to integrate Infocrossing without any delays, “revenues for the year to March 2008 should go up to $4.9 billion, up 5.8% from our original estimate of $4.6 billion,” said Kapoor of ABN Amro, which maintains a ‘buy’ on the Wipro stock.
Wipro’s acquisitions are beginning to yield results. Profits before interest and tax from buyouts touched Rs21.2 crore in the year to 31 March compared with Rs4.5 crore in the previous fiscal. Revenues from acquired companies exceeded Rs500 crore in 2006-07, nearly 10 times more than in the previous year. In fiscal 2008, such inorganic revenues are expected to top Rs2,200 crore.
Of the 190 customers Infocrossing has, a fourth have revenues in excess of $5 billion, “which will give Wipro an opportunity to cross-sell others solutions,” said Senapaty.
Infocrossing serves customers including Ford Motor Co. and Virgin; it shares 40 customers with Wipro.
According to an executive at Wipro who did not wish to be identified, the company hopes to win at least three $100 million plus contracts for managing servers and desktops in the first year, and another three $150 million deals in 2009.
“Pure application development contracts can now be bundled with the infrastructure piece as part of a larger, $500-600 million deal,” said an official who was involved in the deal to acquire Infocrossing. He asked that he not be identified as he is not authorised to speak to the media.
In September 2005, ABN Amro, the Dutch financial powerhouse, outsourced $400 million worth of application development work to Tata Consultancy Services Ltd, Infosys and Patni Computer Systems Ltd, while the world’s largest computer services company, IBM, walked away with a $1.8 billion infrastructure management contract.
“With this acquisition, Wipro is hoping to bag the large infrastructure piece of outsourcing, which traditionally goes to players such as IBM,” said Sabyasachi S. Satyaprasad, senior director at Bangalore-based offshore advisory neoIT.
Comment E-mail Print Share
First Published: Thu, Aug 09 2007. 12 48 AM IST