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Wipro Ltd has been among the most acquisitive companies in the Indian IT services sector. However, it has not had much to show in terms of benefits from the mergers and acquisitions. Its growth has been far behind that of peers such as Tata Consultancy Services Ltd and Infosys Ltd. Now, it has gone ahead with a much bolder bet by picking up a 100% stake in Capco, a consultancy firm in the banking and financial services (BFSI) space, for $1.45 billion.

Considering the chequered history of past acquisitions, investors understandably received the news with cold shoulders. Some analysts were also worried about the premium valuation paid for Capco. Wipro shares fell nearly 4% on Friday on the NSE

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“The key lies in execution and extracting value from the acquisition. Wipro’s track record on that score from acquisitions over the last two decades has been less than average. Despite doing the most M&As among Indian IT firms, Wipro has slipped in revenue ranking within the industry in the last 10 years," said Nirmal Bang Securities Ltd analysts in a report on 4 March.

An expensive bet
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An expensive bet

According to analysts of Jefferies India Pvt. Ltd, the consultancy firm’s ownership had changed hands at a valuation of $795 million in 2017. “Since Capco’s revenues have been flattish at $700 million over 2018-20, an 80% premium to its 2017 valuation seems rich," the analysts said in a 4 March note to clients.

“To get a 15% return on the capital employed.. Wipro will need to strike 7-8 large deals with Capco’s 30 key clients, implying a 25-30% success rate. This is a tall ask given that vendor churn in the BFSI vertical is limited," they said.

It’s important to note here that the Capco buy is part of a series of bold bets being taken by the company in its pursuit of industry-beating growth rates.

Another bold move was to overhaul its organizational structure under new the new chief executive, Thierry Delaporte.

“We have reduced the number of P&Ls from something like 26 down to four. That means a lot less walls inside the organization, a lot less silos and a lot more opportunity for people to work together," Delaporte had said during a mid-January earnings call with investors. P&Ls refer to divisions responsible for their standalone profit and loss outcomes.

Some analysts are worried that Wipro may be doing too many things in its pursuit for growth, which may be risky. After all, large acquisitions usually come with challenges related to integration.

To be sure, Wipro also needs to catch up on growth, and Capco brings with it reasonable scale. It will boost Wipro’s BFSI revenue by 27% to make it a $3.2-billion business. It can also help create cross-selling opportunities with existing clients.

Wipro’s ability to capture this downstream opportunity is partially helped by the fact that Capco already has a technology unit that accounts for around 14% of its revenue. “Wipro believes that Capco is already technology-focused, in addition to its domain expertise and, hence, the likelihood of success is higher," analysts at Investec Capital Services (India) Pvt. Ltd said in a 5 March note.

All said, investors’ reaction suggests they are finding Wipro’s moves a tad too bold for their comfort.

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