Wipro Ltd has added to the string of acquisitions it has made in the past two years with the purchase of Science Applications International Corp.’s (Saic) oil and gas IT (information and technology) practice. The company will pay $150 million (around Rs675 crore) for the business.
Saic has said in a call with analysts late last month that it expects the oil and gas related IT business to contribute about $200 million to its revenue in the year ending January 2012.
It seems a good deal from Wipro’s point of view. After all, it would get access to Saic’s oil and gas customers, something that would have otherwise taken much more time for an offshore-centric firm such as Wipro.
But before celebrating the seemingly low revenue multiple of 0.75 time, one must note that Saic’s oil and gas IT practice operates at very low margin. It was part of its commercial business segment, which reported an operating margin of 4.7% on revenue of $381 million in the year ended January 2011. Profits of the segment nearly halved last year, owing to the loss of a large IT outsourcing client in the UK.
Saic mentioned in the analysts’ call that it expects the divestiture of the oil and gas business to have a slightly favourable impact on the margins of the rest of the enterprise, although of course, the impact would be limited because of the relatively small contribution of this business to the overall revenue (less than 2%). Saic’s shares rose 2% in a flat market on Friday after the sale was announced.
From Wipro’s point of view, of course, what all this means is that it would be a while before the acquired business becomes as profitable as its own. One factor in its advantage is that it can use its large offshore team to cut costs. In fact, a reason Saic decided to divest the unit was its reluctance to invest in increasing its offshore capabilities for a business that was outside its strategic growth area.
It must be noted here that Wipro’s strategy of making a string of acquisitions hasn’t largely been successful. Despite all the acquisitions it has made to plug gaps and strengthen its presence in industry verticals and service offerings, it has lagged peers in terms of overall growth.
According to an analyst with a foreign brokerage, even with the much touted acquisition of Infocrossing Inc., which was made to strengthen its infrastructure management services offering, the outcome hasn’t been great. In fact, some other companies such as HCL Technologies Ltd and Tata Consultancy Services Ltd have delivered higher growth in this segment.
In sum, while the acquisition looks good on paper since it’ll give the company access to new clients and strengthen its presence in the oil and gas space, it remains to be seen if it will add value to it in the long term.
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