Indian IT will acquire more small firms as they look to bridge digital gaps

Industry: Information technology 2016-12-27

Indian IT services firms may invest aggressively in acquiring smaller firms in 2017 to enhance digital technology capabilities.

A large chunk of these acquisitions by companies such as Wipro, Cognizant, Tata Consultancy Services and Infosys, others will be driven by the need for transformation as digital technology firms, say experts. While these companies have seen significant growth in demand for the digital, legacy service business continue to generate nearly 80 percent of their revenues.

The industry witnessed big acquisitions by tech companies like Wipro, Cognizant, Infosys, Accenture as they wanted to increase the share of digital technology business in 2016. While Wipro alone invested nearly $ 1 billion in acquiring two firms, both Infosys and Wipro allocated dedicated venture funds worth $500 million and $100 million, respectively for smaller firms and start-ups. Others have made significant investments in start-ups and to acquire small companies with expertise in digital technology.

Globally, till June 2016, $260 billion of technology merger and acquisition (M&A) deals were announced, Dealogic data stated. The crucial deals among them being Microsoft’s proposed $26.2 billion acquisition of LinkedIn, NTT Data acquiring Dell Services for $3.1 billion or Symantec Corp’s $4.65 billion agreement to buy Blue Coat Systems.

“We expect there will be increased industry consolidation with the larger firms buying the smaller firms. We saw examples of this in 2016. One of the factors that will accelerate acquisitions in 2017 is the need for the Indian firms to transform into Digital companies,” said Peter Bendor-Samuel, chief executive of global technology researcher Everest Group.

Research reports have shown that all the industry growth came from the new “digital” segment, but the legacy business makes up almost 80 percent of revenues.

Delayed outcomes from the organically grown verticals for emerging technology within Indian technology firms have made acquisitions even more important, going forward.

“Compounding this urgency has been the poor track record of the large Indian firms in developing digital practices internally or organically. The slow pace and low market share which this has generated is becoming a drag on their share price and is increasingly worrying to their senior management,” said Bendor-Samuel.

IT outsourcing advisory Information Services Group (ISG) have estimated that 5565 contracts worth nearly $201 billion are up for renewals across geographies and verticals by 2018. Most of these rebids and fresh contracts will be for digital technology solutions, with more businesses allocating cutting spends for traditional IT services.

“Acquisition for both Indian software exporters and their multinational counterparts are irreversible, the number will only increase in 2017 with increased focus on software-as-a-service delivery,” said Dinesh Goel, partner & India head, ISG, without forecasting any number or value of these deals.

Indian IT companies have an adequate fund for buying smaller firms, say industry analysts, but the challenge before them will be to find the right business case.