Cross-border M&A activity set to accelerate
Cross border merger and acquisition activity in the information technology sector is poised to accelerate. Significantly, one may watch out for a really large global player looking at acquiring some large Indian player.
What started with big ticket acquisition of i-flex Solution by Oracle, and recently Kanbay by consulting services provider Capgemini, has had a good number of small companies joining the M&A bandwagon, both to expand presence in new market and also to enhance technology and services capability.
Market Dynamics
The Vice-President of Research at consultancy services provider, Gartner, Mr Partha Iyengar, said the M&A activity in the technology sector is set to accelerate and is witness to certain trends led by the rapidly changing market dynamics.
Providing an insight into the sector, Mr Iyengar told Business Line that this is driven by business imperatives such as global players seeking to step up presence in India, Indian players looking to acquire companies overseas to step up reach, and significantly high level of consolidation within the Indian companies to achieve scale.
The acquisition of i-flex by Oracle reflects how a pure play products company has gone in for a products and services capability, and the likes of EDS and Capgemini, who were relatively slower on the block in India in comparison to say IBM or Accenture, have also taken to acquisition in India.
Hence, we have EDS’s acquisition of MphasiS and Capgemini’s acquisition of Kanbay. This is also because some of these companies are not geared up to filter lakhs of applications to select a few thousands. Since Indian companies have managed to do this, it has added to M&A activity.
Outsourcing Story
There is considerable pressure on large companies and mid-level companies, who are not present in India to step up to be part of the Indian global outsourcing story. While this trend would accelerate in the IT services sector, it would take a couple of years for this to translate in the BPO companies in the country though there have been some instances of M&A activity. This is because a significant part of the activity is confined to call centre work.
So will we see a large Indian IT company acquiring $1 billion company? It is unlikely, Mr Iyengar said: "The risk appetite for such deals is not there. Therefore, we will see many more acquisitions but of smaller nature."
Providing a company perspective, the Chief Financial Officer of Patni Computer, Mr Surjeet Singh, said: "Indian IT companies are increasingly looking at acquisitions to acquire expertise in specific verticals, add new verticals, new service lines, to gain access to a new geography or in some cases to acquire a strategic clients. Other reason would be to build strong local relationship and programme management capabilities."
Gartner Perspective
The Managing Director of Four Soft, Mr Palem Srikanth, said: "As a company in the logistics space, we have made inroads into new markets by acquiring companies and adding technology capabilities. The company recently announced the acquisition of a Danish firm Transaxiom for presence in Scandinavia. For us, M&A, though it comes with challenge of integration, is the surest way to enter new markets."
IndusView has pointed that a survey at TiE (The Indus Entrepreneurs) showed that 80 per cent of the participants expressed plans to merge with either a US or European company. The survey also hints at the possibility of investment of up to $10 billion in acquisitions in Europe.
From a Gartner perspective, IT trend is like a pendulum where at one side Indian premium offshore services providers are aligned versus other global providers on the other side. In the last 3-4 years it swung in favour of Indian companies, but this time it appears there is some advantage for larger MNCs. Watch out for East Europe, as it is a market with significant potential and opportunity, Mr Iyengar said.
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