Info-tech

Why do Indian IT companies shy away from large acquisitions?

Rajalakshmi Nirmal BL Research Bureau | Updated on January 20, 2018 Published on June 14, 2016

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Cultural issues, high-cost staff and tech discourage cross-border buys: experts





Mergers and acquisitions are the way to grow in these difficult times and bigger tech companies in the global market appear to know this well.

Outside of Microsoft’s buy this week of LinkedIn for a whopping $26.2 billion, there have been several large-size acquisitions of late, including Dell-EMC, HP-CSC, Atos-Xerox ITO and Capgemini-iGate.

But back in India, there have hardly been any deals of even half a billion dollars in the IT/BPO space. HCL-Geometric, Infosys-Panaya, Wipro-Designit and TCS-Alti acquisitions in recent times have all been just $100-200 million in size.

The largest so far in the domestic market by an Indian company was HCL’s Axon acquisition in 2008 for $658 million. TechMahindra’s Satyam Computers acquisition in 2007 was for $580 million.

This is despite the fact that big Indian IT companies have their coffers overflowing with cash of about $4-5 billion. All this money goes into mutual funds and government securities.

So, what stops Indian tech companies from looking for opportunities outside?

Says Pareekh Jain, Research Director, Engineering Services at HfS: “Indian IT companies have been able to grow revenues organically for the last 20 years, so unless growth turns negative, they will not be looking at acquisitions.”

Indian companies are comfortable with niche acquisitions, says Dinesh Goel, partner at ISG. “They look for acquisitions that make sense for them on the platforms or services front.”

Nasscom President R Chandrashekhar also holds a similar view. “Acquisition is not a matter of just spotting a company and signing a deal. You have to see the fitment of that company in what you need and whether the target company is willing to make the transition and whether an appropriate price for that can be found.

“While I agree that there is need for a greater aggressiveness in looking for acquisition opportunities, it doesn’t necessarily mean that there should be greater aggressiveness in closing an option at any price because at the end of the day all of those also impact the competitiveness of the company,” he said.

“You have to be really big and have really deep pockets before you can pay $19 million for a 55-member company as was paid for WhatsApp,” added Chandrashekhar.

A few months ago, the market was abuzz with TCS’ likely acquisition of Dell Inc’s IT Services business but the deal didn’t go through as the companies couldn’t agree on the price. Dell reportedly asked for about $5 billion.

Even Infosys isn’t aggressive enough on acquisitions. While it targets $20 billion in revenue by 2020, only $1.5 billion of this is expected from acquisitions.

Risks

There are many inherent risks to cross borders acquisitions that hold back companies from vying for M&A opportunities, say industry experts.

First, it becomes a tough task to integrate operations of two companies as there are cultural issues. Shedding manpower or combining similar operations under one division becomes tough due to differences in the way the work is done. Secondly, as many of these companies have an onsite presence and also expensive manpower and technologies, the margins are lower and this exerts pressure on profitability of the entire company.

But, if Indian companies continue to remain conservative, and want to grow only by building capabilities internally, they may end up losing the race to peers such as Cognizant and Accenture in the global market, say experts.

M&A action may be strong, however, among mid-size companies space, says Pareekh Jain. “There is a renewed interest from PE companies in mid-tier IT services companies now. They are anticipating consolidation in the space in the medium term and want to benefit from it by investing now.”

In March, there was talk of Tech Mahindra looking to acquire a stake in Mphasis, but eventually it was Blackstone, a PE investor, that stuck a deal with Mphasis.

Published on June 14, 2016
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