India’s 10 largest information technology (IT) services companies have announced $4.3 billion in acquisitions in the current fiscal year, the highest since the turn of the century, as they look to acquire new competencies in AI and cloud technologies at a time of rapid technological change.
In FY25, the 10 companies paid $10.8 billion ( ₹96,557 crore) in dividends and share buybacks and about $1.5 billion (around ₹14,000 crore) on acquisitions, Mint research showed. Earlier in FY22, the same companies spent about ₹27,000 crore on buyouts and gave ₹81,669 crore to shareholders. Significantly, a few of the cash-rich, homegrown IT services firms, including Coforge Ltd and Hexaware Technologies Ltd, are now spending more on acquisitions than on returning cash to shareholders through dividends and share buybacks.
A big chunk of the FY25 acquisitions was courtesy Tata Consultancy Services Ltd, the risk-averse leader of the IT pack, which agreed to spend $773 million to buy out US-based digital marketing services firm ListEngage, and Florida-based Salesforce consulting firm Coastal Cloud. In its first analyst day in over a decade earlier month, TCS told analysts that the company “will be more acquisitive, mainly for capabilities,” according to analysts at Kotak Securities. Interestingly, TCS has bought fewer than a dozen companies since going public in 2004, choosing to build technologies in-house.
“TCS highlighted a dual strategy of deepening AI ecosystem partnerships across hyperscalers, platforms, domain leaders, and AI-native firms, while pursuing selective M&A to strengthen capabilities in cloud, cybersecurity, digital, enterprise platforms, and advisory,” wrote Pritesh Thakkar and Sujay Chavan, analysts at PL Capital, in a note dated 18 January.
Additionally, more deals are driven by mid-tier firms like Coforge, which last week announced the largest acquisition by an Indian IT firm, agreeing to buy US software firm Encora in an all-stock deal valued at $2.39 billion. With this, Coforge, the seventh-largest IT services firm, has spent ₹21,450 crore on acquisitions in the first nine months of the fiscal. During this time, it has paid ₹260 crore in shareholder payouts. Hexaware, which follows a January-December fiscal year, has spent ₹1,614 crore on acquisitions, while it has paid ₹349 crore to shareholders as of 30 September.
Infosys Ltd, HCL Technologies and Wipro Ltd together spent $1.03 billion to buy seven companies in the first nine months of the current fiscal. Some of their acquisitions are in data analytics, design engineering and cloud computing.
“The record acquisition spend reflects a recognition that the old playbook has expired, and waiting to build everything in-house risks falling behind global competitors and hyperscalers,” said Phil Fersht, chief executive of HFS Research, a Massachusetts-based IT research and consulting firm.
“What we are seeing now is urgency. Acquisitions are used to buy speed, relevance, and proximity to demand in areas such as cloud, data, AI platforms, and industry-specific capabilities. This is less about empire building and more about closing capability gaps quickly in a market where technology cycles are compressing,” said Fersht.
IT's acquisition spree comes on the back of slowing growth. TCS, Infosys, HCLTech, Wipro and Tech Mahindra reported revenues of $30.18 billion, $19.28 billion, $13.84 billion, $10.51 billion, and $6.26 billion respectively in the last fiscal. While TCS, Infosys, and HCLTech reported revenue growth of 3.8%, 3.9%, and 4.3%, respectively, Wipro and Tech Mahindra reported full-year revenue declines of 2.7% and 0.2%, respectively.
This year won't be much different either.
Mid-tier firms, including LTI Mindtree Ltd, Coforge Ltd, Persistent Systems Ltd, Mphasis Ltd, and Hexaware Technologies Ltd grew faster than their larger peers last year. They are expected to clock faster growth in this fiscal, although some of them are also showing signs of slowing demand for their services.
This slow growth has mirrored muted investor sentiment: Shares of IT firms have lagged the BSE Sensex this year. Seven of India's 10 largest IT services companies have reported share price declines of 2-20% between 1 January and 26 December. LTIMindtree’s shares rose 8%, while Hexaware, which started trading on the stock exchanges on 19 February, saw its share price rise 6.1%. Mphasis Ltd’s share price has remained unchanged since the start of the year.
In contrast, the BSE Sensex is up 8.83% since the start of the year, closing 26 December at 85,041.45 points.
“IT services companies realized that higher shareholder payout is not helping increase the allure to shareholders, and now, they have to spend more money to accelerate growth,” said Amit Chandra, vice-president at HDFC Securities. “ A higher payout strategy worked pre-covid but now, in terms of valuation, this isn’t working, so this is a shift in strategy. Companies will continue to prioritize acquisitions in order to drive valuations and chase growth.”
A potential flipside to the buyout spree could be on the profitability of some of the firms.
“IT services companies’ profitability can get eroded when such acquisitions happen because the retention cost of talent that comes in with these companies is high,” said Chandra.
Fersht pointed out that shareholder payouts are likely to moderate in the coming years as companies spend more on acquisitions.
“Indian IT services firms are entering a phase where capital needs will rise before returns stabilize again. Investments in AI platforms, domain capabilities, nearshore presence, and targeted acquisitions will increasingly compete with shareholder payouts,” said Fersht.