Persistent Systems' $1.4 billion acquisition of German software engineering firm Nagarro is the latest in a series of deals by Indian information technology (IT) companies. It follows Coforge's $2.35 billion purchase of Encora. Their larger peers like Tata Consultancy Services (TCS), Infosys, Wipro and Cognizant have also announced acquisitions in the past few quarters. Unlike earlier consolidation cycles, this one is driven by artificial intelligence (AI). As AI automates coding, testing and other routine software work, the traditional IT services model based on billing for headcount is under pressure. Companies are acquiring AI capabilities and specialised talent, but these deals also bring risks.
Deal strategies
Indian IT companies are increasingly using acquisitions to strengthen their businesses. However, the strategy differs sharply between large-cap and mid-tier firms. Large-cap companies have largely avoided transformational deals, preferring smaller acquisitions that fill capability gaps in areas such as AI, cloud computing and cybersecurity.
For example, India's largest IT services firm, TCS, acquired Coastal Cloud for $700 million to strengthen its Salesforce and AI capabilities. Infosys acquired In-Tech for $480 million to expand its engineering R&D capabilities in the German automotive sector. Their deal sizes remain relatively modest because these firms tend to return cash to shareholders through dividends and buybacks.
Mid-tier firms, by contrast, are pursuing much larger acquisitions to accelerate growth, expand geographically and compete for global contracts. Coforge acquired US-based Encora for $2.35 billion to expand its US presence and scale its business. Similarly, Persistent Systems agreed to acquire Germany's Nagarro to increase its footprint in Europe. Unlike their larger peers, mid-tier firms have greater flexibility in deploying capital for acquisitions. Despite these different approaches, both groups are using acquisitions to strengthen their businesses as AI-led automation puts pressure on traditional IT services.
Global benchmarks
These deals reflect global deal-making. Global technology M&A is also being driven by AI. In the first five months of 2026, technology, media and telecommunications deal values rose 48% year-on-year to $472 billion. It's driven by mega AI deals, with transactions above $5 billion accounting for nearly half the value. Much of this activity focuses on securing access to the AI stack—from foundation models and data to compute, power, and cloud infrastructure. Because these assets are too expensive to acquire outright, companies increasingly rely on minority investments, partnerships and long-term commercial agreements instead of full buyouts.
Indian IT acquisitions are far smaller and continue to follow the traditional acquisition model, with firms buying companies to acquire technology capabilities, engineering talent and geographic reach. The top 10 Indian IT companies spent a combined $4.5 billion on acquisitions in the first half of 2026.
Despite these differences, global AI dealmaking is reshaping valuation benchmarks. Indian companies are paying higher multiples for AI and engineering assets as investors increasingly value businesses with AI capabilities and defensible technology.
Growth pressure
AI is reshaping the Indian IT services business by automating routine software development, testing and maintenance work. This challenges the industry's traditional model of billing clients based on employee headcount and hours worked.
As AI improves productivity, clients are demanding lower prices and fewer billable hours, putting pressure on both revenue growth and profit margins. Jefferies estimates that, in a worst-case scenario, AI could reduce industry revenue growth by three percentage points over the next five years before growth flattens after 2031. Operating margins have also narrowed across several leading firms as productivity gains are increasingly shared with customers.
In response, IT companies are using acquisitions to build capabilities that would take years to develop internally. Rather than buying scale, they are acquiring AI platforms, digital engineering expertise and specialised talent to reposition their businesses for AI-driven demand. Coforge's $2.35 billion acquisition of Encora strengthens its AI engineering capabilities, while Wipro's $375 million purchase of Harman Digital Transformation Solutions expands its expertise in AI-powered digital engineering. These acquisitions are aimed at offsetting pressure on traditional outsourcing revenues and positioning companies for the next phase of growth.
Talent shift
As AI automates routine coding, testing and maintenance work, it is reducing the industry's reliance on mass hiring to drive financial growth. The shift is already visible in hiring trends. India's largest IT companies have recorded a net decline in headcount since 2023, with TCS reducing its workforce from about 615,000 to 585,000 employees and Wipro from nearly 257,000 to 240,000. The focus is shifting from adding large numbers of engineers to building smaller, highly specialised teams with expertise in AI, cloud and digital engineering.
Acquisitions have become an important part of this transition. Instead of hiring thousands of employees organically, companies are buying firms that already possess scarce skills and established engineering teams. For example, Coforge's acquisition of Encora added more than 3,100 AI and engineering professionals in Latin America, while Wipro's purchase of Harman Digital Transformation Solutions brought 5,600 employees with expertise in embedded software, device engineering and AI.
As AI reshapes the industry, acquisitions are becoming less about expanding headcount and more about securing specialised talent.
Execution risks
As AI disruption and expensive acquisitions weigh on the sector, investor sentiment has weakened. The Nifty IT index has fallen sharply in 2026. Markets have also reacted cautiously to large acquisitions. Persistent Systems' shares declined after it announced the acquisition of Nagarro, for which it offered a 140% premium over its closing price. To fund the deal and refinance Nagarro's existing debt, Persistent is securing a €1.4 billion loan from Barclays.
There are also concerns about execution. Acquisitions come with integration risks, including combining workforces and protecting profit margins. For instance, Nagarro operates at a 13.8% adjusted Ebitda margin compared to Persistent’s 15.6% Ebit margin.
More importantly, acquisitions won't solve the industry's problems. The sector will have to look beyond the traditional pricing model. Last year, at Nasscom's Technology and Leadership Forum, C. Vijayakumar, chief executive officer of HCLTech, said, "We need to dramatically change from being input-based to becoming more output- and outcome-based; even cannibalise our revenues to create completely new businesses".