Home >companies >news >Accenture raises the stakes with $1.8 billion acquisition plan

Bengaluru: Accenture Plc plans to spend $1.8 billion on acquisitions this year—more than what its three biggest Indian information technology (IT) rivals combined spent in the past three years—as it seeks to accelerate growth.

Aided by the planned acquisitions of companies such as analytics and cloud computing firms, Accenture, which does as much business as Tata Consultancy Services Ltd (TCS), Infosys Ltd and Wipro Ltd put together, is poised to outpace them in growth this year for the first time since it went public in 2001. The acquisitions plan was spelt out in a post-earnings call with analysts.

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Accenture, which follows a September-August fiscal, is expected to report a 6.7% dollar revenue growth in the year to August 2018, according to Keith Bachman, an analyst with BMO Capital Markets.

Indian IT firms, which follow an April-March fiscal, will have to better their performance from last year or risk growing slower than Accenture.

TCS, Infosys and Wipro reported a dollar revenue growth of 6.2%, 7.4% and 4.9%, respectively, last year. Although TCS and Wipro do not provide an annual growth forecast, Infosys expects its revenue to grow 6.1-8.1% this year—a guidance that analysts say could be cut in coming months.

This aggressive acquisition model of Accenture, which spent more than $900 million in each of the past two years on buying companies, is driven by Fortune 1000 clients demanding from their IT vendors solutions that help them run their businesses better. Newer technologies, such as data analytics and cloud computing, along with a strong consulting practice, are the growth drivers for technology outsourcing vendors as customers across industries are spending less on traditional outsourcing work like application maintenance.

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More acquisitions have also helped Accenture make itself future-ready: Last week, Accenture, reporting its third quarter earnings, said its “new" offerings, which include digital, cloud computing and security-related solutions, accounted for 50% of revenue. A contrarian, conservative approach by its Indian rivals, which have together spent $1.66 billion in acquisitions since April 2014, appears to be to build digital capabilities from grounds-up, and this underscores the struggles at domestic IT firms.

“Accenture has done a tremendous job with financial engineering and M&As (mergers and acquisitions)," said Ray Wang, founder of Constellation Research, a technology research and advisory firm. “They have bought their way into offensive growth, entered new markets such as AI (artificial intelligence), marketing operations, and digital transformation with design firms faster than others."

Since 1 April 2014, TCS, Infosys and Wipro have together spent $1.58 billion on acquisitions, with $80 million more spent together by Infosys and Wipro through their corporate venture arms in making minority investments in close to two dozen start-ups.

Accenture is expected to end FY17 on 31 August with at-best 5.8% dollar revenue growth. For the year to August 2016, the management said its 15 acquisitions accounted for 2 percentage points of overall 10.5% constant currency growth (6% dollar revenue growth). Constant currency eliminates effect of currency movements.

“If M&A contributes two points of growth to FY17 revenue, then inorganic revenues may contribute higher growth in FY18," Bachman wrote in a note dated 22 June, after Accenture reported its third-quarter March-May earnings. “We continue to believe Accenture is well positioned in an evolving digital market."

Importantly, none of Accenture’s 40 acquisitions over the past three years are large: More than three-fourths of the firms acquired have less than 200 staff, estimates JPMorgan Chase and Co. analyst Viju George.

However, Indian IT firms continue to look away from acquisitions. TCS last invested $50 million in stitching together a joint venture partnership with Mitsubishi Corp. in Japan in 2014 while Infosys has not made an acquisition in over 20 months. Wipro, which spent $1.14 billion in buying five firms over the past 36 months, has spent $8.7 million to buy one firm in the past eight months.

All Indian firms claim they constantly evaluate M&A opportunities but some experts say they need to change the way they have approached acquisitions if they want to keep pace with firms such as Accenture. “I think the reason Indian IT companies have been reluctant comes more from the pressures at the board level and with external shareholders," said Ray Wang, founder of Constellation Research, a technology research and advisory firm. “The DNA of an M&A organization is different from organic growth. This will require some management changes like having a more decentralized management and also more executives who have high growth M&A experience."

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