Indian IT firms slow in merger and acquisitions

Indian IT firms slow in merger and acquisitions

Bangalore/Mumbai: Close on the heels of Dell Inc.’s acquisition of Perot Systems, the purchase of Affiliated Computer Services Inc. by Xerox Inc. is further evidence that Indian information technology (IT) firms are being caught flat-footed in hunting down opportunities for inorganic growth and achieving scale as the industry consolidates, according to analysts.

Dell, primarily a hardware maker with a strong presence in the personal computer and server market, was looking to beef up services with last week’s $3.9 billion (Rs18,720 crore) Perot acquisition.

Also Read 500 employees of ACS moved to Patni’s rolls

Xerox, seen as a document management company, wants to transition to a technology services company. Earlier, in May 2008, Hewlett-Packard (HP) acquired EDS for $13.9 billion to strengthen its IT services offerings.

Unlike hardware and software products, IT services traditionally tend to weather slowdowns better as contracts are usually spread over a number of years and offer predictable revenues.

The increased mergers and acquisition (M&A) activity is an indicator of the consolidation in the industry, as companies try to cope with cuts in IT spending. In June, research firm Forrester Inc. had forecast that global IT spending for hardware, software and services will drop by 10.6% to $1.53 trillion.

The ACS acquisition is likely to have an impact on Indian IT players such as Tata Consultancy Services Ltd (TCS), Infosys Technologies Ltd and Wipro Ltd as the company got about 40% of its $6.16 billion revenue last year from providing business process outsourcing (BPO) and IT-enabled services to the US government.

“It enables ACS, a market leader in BPO, to quickly expand its global reach and benefit from Xerox’s technology and innovation," Carol DeMatteo director, corporate communications, at ACS, said in an email. “It gives Xerox the scale to attack the $150 billion BPO market through a combination of services, technology and innovation."

Even as large enterprises and other private sector players in the key US market have been cutting IT spending, the US government has been stepping up expenditure as it seeks to reform the financial and healthcare sectors.

Kumar R. Parakala, head of global sourcing advisory services at audit and consultancy firm KPMG says that so far, Indian players have been sitting and watching the deal-making happening on the global scene.

While some of the hardware players have been acquiring services companies to emerges as end-to-end players, Indian IT companies which are primarily in the services business have not yet made any major moves in the market.

“The pressure to merge and build partnerships hasn’t come to India, yet. But Indian players are sitting on large cash reserves and I would not be surprised to see a tie-up between an Indian IT services firm and a hardware/infrastructure firm," Parakala said.

Clients are increasingly looking for end-to-end solutions and having a hardware portfolio helps those who already have a well-diversified services portfolio, Parakala added.

This works both ways. “For the Indian IT services firms, it has become more of an imperative to diversify into the hardware/product space. If they want to compete globally, they need to have a product line like IBP, HP or Dell," said Milan Sheth, partner, technology advisory services at global audit and consultancy firm Ernst and Young. “It would be an interesting play for the next phase of growth."

Hitesh Kuvelkar, associate director of research at Mumbai-based brokerage and investment advisory firm First Global Stockbroking Pvt. Ltd feels that as valuations have come down with the global market going through the downturn, Indian players who have hitherto been cautious will now look for acquisitions in verticals such as government and healthcare, where they don’t have much presence. “This is true, especially in the crucial North American market."

Adding that the IT services industry has matured and linear growth is becoming harder, Kuvelkar says that consolidation is inevitable and inorganic growth is the only way to maintain past growth levels.

However Chandramouli C.S., director at IT outsourcing advisory Zinnov Management Consultants Pvt. Ltd, feels that in the immediate term of one to two years, neither the Dell-Perot deal or Xerox-ACS deal will have any impact on Indian services firm, because integration is a rather lengthy process in such large deals. “However, in the long term, Indian players will need to act decisively to be able to compete globally, especially in the wake of international hardware vendors transforming into services providers and offering single-window solutions for clients," Chandramouli said.

Out of its global workforce of 70,000, ACS employs 5,000 people in India. In March, Mint had reported that ACS had transitioned about 500 of its employees on to the rolls of Patni Computer Systems Ltd in a sub-contracting arrangement.

“There is a real demand from enterprises and governments for the services we can deliver on a global scale," said DeMatteo of ACS. “This transaction creates the leading global enterprise for comprehensive document and business process management, and a single provider for enterprises and governments to do the three things that matter most: reduce costs, improve processes, and manage information more efficiently."

ACS in India operates out of five centres in Bangalore, Chennai, Kochi, Gurgaon and Noida.

Xerox India’s spokesperson Sharad Gupta did not offer any comment on implications following the acquisition.