Buoyed by optimistic business environment, IT and BPO companies have emerged on top of league tables this year with some high-voltage merger and acquisition (M&A) deals.

The value of buyouts and private equity (PE) transactions announced in this space since January 1 has crossed $2 billion — surpassing the levels touched in the year-ago period (about $380 million), as companies such as iGate, Genpact and Wipro closed in on acquisition targets.

According to data compiled by advisory firm Grant Thornton, the combined value of deals announced between January and April (year-to-date) in the tech and BPO space is nearly five times higher than the numbers of the corresponding period last year, although the volumes are lower. Close to 41 deals have been announced so far this year including M&A and PE investments, against 62 deals same time last year.

“The M&A activity is an outcome of people having greater confidence in the business environment and future. Companies are now saying we are willing to pay what the sellers want, as the outlook is clear,” says Mr Pramod Bhasin, President and CEO of Genpact.

The company earlier this week announced a definitive agreement to acquire Headstrong Corporation — a consulting and IT services firm with specialised focus on capital markets — for $550 million (or Rs 2,420 crore) in cash.

Genpact is hungry for more — this time it's eyeing “tuck-in” buyouts. “We would love to do more…. Smaller acquisitions with niche and specialised focus in areas like healthcare, analytics, and even banking and insurance,” says Mr Bhasin.

Analysts tracking the sector expect the tempo in the IT-BPO segment to continue. “We expect a couple of more deals to be concluded in 12-18 months. There are a lot of assets in place on the BPO side, where PE money has been invested. With some PE investors reaching the end of their investment cycles, some of these funds may look at exit options,” says Mr Gaurav Gupta, managing partner at Everest Group.

Moreover, as the market for IT and BPO services matures further and clients choose to outsource to fewer vendors, Tier-II players who do not have differentiated offerings could come under pressure, prompting consolidation in the industry, Mr Gupta points out.

Mr Harish HV, Partner at Grant Thornton India, notes that while there is a definite scale-up push in the mid-tier through takeovers and buyouts, some of the larger companies are still not very active in the M&A space. “They will come sooner than later,” he says.

It may be recalled that 2011 kicked-off on a high note when iGate announced it would acquire 63 per cent stake in India's sixth largest IT firm, Patni Computer, for about $921 million (Rs 4,188 crore). The deal size will further go up to about $1.22 billion after the mandatory 20 per cent open offer. Another notable deal this year was Wipro's acquisition of the oil and gas IT practice of US-based Science Applications International Corporation for $150 million (about Rs 670 crore).

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