Home >Markets >Mark To Market >Hexaware Technologies’ digital drive needs careful execution

Investors’ reaction to Hexaware Technologies Ltd’s acquisition of Mobiquity Inc. has been guarded. The stock opened 2% up on Friday, but ended with a loss of 0.4%.

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Hexaware’s banking and financial services unit, which generates about 40% of its revenues, has hit a soft patch. Besides, the prevalent demand for digital services, coupled with a talent crunch, has made smaller firms vulnerable to cost pressures. As attrition inched up, profit margins dropped to record lows last quarter.

“Attrition jumped 120 basis-points QoQ owing to a tight US labour market and a higher-churn in the offshore job market. We believe this is a precarious situation for smaller companies, as expanding deal size favours large peers and talent migrates to larger companies," Edelweiss Securities Ltd said in a note in April.

Hence, Mobiquity’s acquisition helps address some concerns. With its strong digital capabilities, it will equip Hexaware to compete directly with large digital agencies. Mobiquity will also pitch Hexaware’s customer experience services.

Second, the company can leverage Mobiquity’s partnerships. One such is with Backbase, a provider of omnichannel digital banking platform that helps banks and financial institutions accelerate their digital transformation. The partnership opens new business avenues for Hexaware, given its high dependency on banking and financial services.

However, as is the case with most acquisitions, the proof of the pudding lies in its eating. To preserve Mobiquity’s identity, Hexaware does not want to fully integrate the firm with itself. In fact, it plans to invest in Mobiquity to derive better prices. The strategy may help improve Mobiquity’s profitability. According to the management, this is slightly lower than Hexaware, based on the past financials.

Mobiquity’s annual revenue, up 23% in the last two years, is about 10% of Hexaware’s. Hence, the acquisition is not expected to have any impact on Hexaware’s earnings in FY20, if one excludes transaction costs.

But the IT industry’s past experiences with acquisitions have not been easy. Cultural differences and employee separations, post-acquisitions, have hampered benefits in the past.

For now, Hexaware is doing a prudent thing by keeping Mobiquity as a separate entity. However, the acquisition’s success hinges on talent retention and deal wins, apart from driving other synergies between the two companies.

“Though the acquisition will lead to short-term stress on the balance sheet and could also reduce the dividend payout capability, its synergistic value can be immense if executed properly. We will wait for a few quarters of execution before we reassess our ratings," analysts at Edelweiss said in a note.

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