Bangalore: Wipro Technologies, the software services arm of Wipro Ltd, said it would buy Infocrossing Inc., a US information technology firm that manages infrastructure such as desktops and communication networks and offers business process outsourcing services, in cash for $600 million (Rs2,430 crore).
The acquisition will help Wipro, ranked No. 3 by revenues among Indian software services peers, to bid for large total outsourcing contracts.
Monday’s acquisition will land Wipro data centres in five US locations, expertise in mainframe computers (still used by large corporations such as banks), 190 customers, and around 900 professionals from Infocrossing, a 23-year-old company listed on the Nasdaq stock exchange.
Wipro will pay $18.70 for each share of Infocrossing, a 13% premium on the average price the stock traded in the last six months. Infocrossing earned a net profit of $8.5 million on revenues of $229 million in 2006 and has assets valued at $300 million. The company has a debt of around $60 million.
An analyst called the acquisition expensive. “When Wipro discussed with us recently, they said this acquisition will be leveraged for large, mega deals as onsite data centres are required for executing such contracts,” a tech analyst with the Indian unit of a European brokerage said, asking that he not be identified because he did not have full details of the buyout. “However, since they have paid almost 12 times the Ebitda of the company, the deal does look overvalued.” Ebitda, short for earnings or profits before interest, tax, depreciation and amortization, is a measure of the profitability of the core operations of any business.
Wipro defended the price. “Every good property has a very good price,” said Suresh Senapaty, chief financial officer of Wipro Ltd. “The margins (of Infocrossing) are between 12% and 15%—much lesser than the margins of Wipro Technologies. It will be improved over the next two years by better staff utilization and bigger contracts.”
Shares of Wipro shed 2.72% ahead of the announcement, made after market hours, to close at Rs457.40 each.
Wipro and other leading vendors such as Tata Consultancy Services Ltd (TCS) and HCL Technologies Ltd are now competing with large global firms such as Accenture Ltd and International Business Machines Corp. (IBM) for grabbing a share of the more than $50 billion a year remote IT infrastructure management business, which involves managing desktops, servers and communication networks of large enterprises such as General Electric Corp. and Dutch financial major ABN Amro NV.
Cambridge, Massachusetts-based research firm Forrester Research Inc. said in a June report that Indian vendors TCS, Infosys Technologies Ltd, Wipro and HCL had achieved leadership position in a study of 19 vendors, which included IBM, Accenture and Hewlett-Packard Co., which have traditionally offered infrastructure management services to customers, a business that the Indian companies don’t have a presence in yet.
“The combined infrastructure business (of Wipro and Infocrossing) is expected to touch over $1 billion in 24-36 months,” said K.R. Lakshminarayana, chief financial officer for Wipro Technologies.
Wipro earned $250 million in infrastructure services for the year to March.
An outsourcing consultant said Wipro’s Infocrossing acquisition was driven by the ne-ed for growth in a market that has incumbent leaders muscling into the turf of offshore Indian vendors. “This is one of the biggest acquisitions by an Indian player and it’s clear that the move is aimed at bagging larger outsourcing deals,” said Siddtharth A. Pai, partner and managing director of TPI Advisory Services India.
Infocrossing is Wipro’s tenth buyout since 2005. The Bangalore-headed firm calls its buyout plan a “string of pearls” strategy where the targets deliver significantly more value when together than separately. Such acquisitions, it says, will add strategic value as also increase the depth of its service offerings.
The Azim Premji-led firm said in July that its consumer care business would pay close to Rs1,000 crore to acquire Un-za Holdings Ltd, a Singapore-based consumer care firm that would give it market access in Southeast Asia. Wipro’s earlier acquisitions include Newton, Massachusetts-based Ner-veWire Inc., Austria’s NewLogic Technologies and Saraware Oy, a Finnish design and engineering services firm for telecommunication companies.