The Hindu Business Line : Cash-rich companies set M&A counters buzzing

On the deal street
As many as 71 cross-border deals added to nearly $2.57 billion
However, the PE deals slumped to $488 million during the period
‘More global firms, under pressure, will look to sell captive units’

Moumita Bakshi Chatterjee

New Delhi, Dec. 25 The Wall Street meltdown and global financial crunch notwithstanding, cash-rich IT and BPO firms are on a bargain-hunting spree on the deal street. The IT and ITES companies have witnessed M&A and PE investments worth $3.7 billion in the year up to December 15 surpassing $3.62 billion in 2007.

The figure would be higher if Wipro’s recent $127 million acquisition of Citi Technology Services, the India-based captive IT unit of Citigroup Inc, is tagged on to the list.

Valuations more realistic

A CFO of a large Indian IT services company says that the valuations, which were earlier ruling at 1.5-2 times sales, are now more realistic. “It has now come down to one time sales. Also, many customers are trying to hive off their non-core business and picking-up such assets can bring committed revenue and access to new customers,” he said but did not wish to be named as the company has entered a quiet period ahead of the results season.

Of the total M&A & PE deals worth $3.7 billion, as many as 71 cross-border deals added to nearly $2.57 billion ($2.51 billion in 2007), according to advisory firm Grant Thornton. This included $2.27 billion of outbound acquisitions and $306 million in inbound deals.

However, even as the IT companies went on an acquisition overdrive, the PE deals between January and December 15 slumped to $488 million ($744 million in 2007).

The big ticket acquisition this year included Citi’s sale of its captive BPO unit to Tata Consultancy Services in a $505-million deal in October; and HCL Technologies buy-out of UK consulting firm Axon for $658 million earlier this month.

In July this year, BPO firm Quatrro acquired over 60 per cent stake in Babel Media (it invested in the company along with DE Shaw group). BPO firm WNS acquired UK insurance major Aviva’s BPO business for around $228 million.

“In the current environment, getting pure outsourcing deals have become more difficult. IT companies that have huge piles of cash are looking at leveraging it to get more business. And so the acquisitions are coming with sourcing agreements, which offers clear revenue streams,” says Mr Nishant Verma, Vice-President of advisory firm Tholons Capital. For instance, Wipro-Citi Technology Services deal came with Master Services Agreement under which the banking giant will source services worth at least half a billion dollars from the Indian vendor.

Momentum may sustain

Mr Harish HV, Partner (Corporate Advisory Services), Grant Thornton, points out that the IT industry had realised that the past growth rates in the industry are not sustainable only on an organic basis.

“So they are now leveraging the sentiments in the global market as also the valuations to their advantage,” he says, adding that the momentum is likely to sustain in 2009, as more global firms, under pressure, will look to sell captive units.