One grouse investors have had with some Indian information technology (IT) companies is that they haven’t adequately used the cash on their books to spur growth through acquisitions. But given the largely disappointing experience Indian IT companies have had with acquisitions, may be being conservative is not such a bad thing after all.
A recent report by JPMorgan Research analyses acquisitions by Indian IT companies worth more than $500 million, and concludes that more often than not, large acquisitions don’t live up to the expectations of the acquirer. The report is aptly titled, Damned if you do, damned if you don’t.
For instance, the report points out, Wipro Ltd’s acquisition of Infocrossing Inc. in 2007 for $600 million hasn’t helped the company consolidate its prevailing leadership in infrastructure management services. In the past two years, HCL Technologies Ltd and Tata Consultancy Services Ltd (TCS) have grown at much faster rates and have taken over the leadership in this segment. HCL Tech’s acquisition of Axon Group Plc, the analysts point out, has been partly successful. While the company has been able to cross-sell its home-grown infrastructure services to Axon clients, its performance in the enterprise solution segment has disappointed after the acquisition.
An earlier transaction by the company (albeit smaller), in which it bought Deutsche Bank AG’s stake in DSI Financial Solutions Pte Ltd, hasn’t worked very well either, according to the report. And the 2002 merger between Polaris Software Labs Ltd and OrbiTech Solutions Ltd was a failure, going by the company’s growth since. More recently, iGate Corp.’s purchase of Patni Computer Systems Ltd hasn’t yet worked wonders. On the contrary, the company’s quarterly growth rates have languished even below that of Wipro’s.
The only successful large acquisition has been TCS’s purchase of Citi group’s business process outsourcing (BPO) arm, formerly known as e-Serve International Ltd. JPMorgan analysts point out that TCS’s BPO business has grown at a compounded quarterly growth rate of 5% since the acquisition, far ahead of competitors. It’s still early to comment on Infosys Ltd’s acquisition of Lodestone Holding AG, although initial signs haven’t been encouraging.
Overseas companies such as Cap Gemini SA and Computer Sciences Corp. that acquired Kanbay International Inc. and Covansys Corp., respectively, to shore up their India offshoring presence haven’t been successful either. In fact, Accenture Plc, which has relied on organic growth, has done much better in the offshoring space.
Does all this mean that Indian IT companies should rather not engage in mergers and acquisitions? Not quite. But clearly, given the disappointing experiences in the past, they need to be far more careful with due diligence and in managing acquisitions. Needless to say, the sub-optimal returns they are earning on cash are preferable to destroying shareholder value through failed acquisitions.