Top IT services companies are increasingly acquiring smaller cloud firms as a strategy to grow their cloud business, which has accelerated as clients embraced digital transformation during the pandemic.
These specialized firms bring in ready talent and technology capabilities that complement their existing domain expertise during a time when companies like Infosys Ltd, Wipro Ltd and Cognizant Technology Solutions Corp. have seen their digital revenues spiking, especially from cloud.
“Acquisitions are helping IT services companies jump-start and quickly bulk up their cloud capabilities to capture market share,” said Nitin Bhatt, Technology Sector Leader, EY India. “Building in-house capabilities would be time consuming and the opportunity cost would be too high. In addition, such acquisitions are helping infuse and grow the cloud DNA in areas that the legacy software companies have been lacking.”
Infosys has already made three cloud-related acquisitions this year. In March, it acquired Simplus, a leading Salesforce consulting and advisory firm in the US and Australia, in an up to $250-million deal.
Earlier this month, it acquired GuideVision to strengthen its Cobalt portfolio, an umbrella offering for everything related to cloud, and one of its biggest organic investments in recent times. It also entered into an agreement to acquire digital customer experience company Blue Acorn iCi for up to $125 million.
In August, Wipro Ltd completed the acquisition of Belgium-based 4C, one of the largest Salesforce partners in the UK, Europe, and Middle East for 68 million euros (about ₹585 crore) to strengthen its cloud business. 4C has now been consolidated as part of Wipro’s Salesforce practice, which provides solutions globally around multiple Salesforce clouds and its ecosystem of products.
This month, Wipro said it will acquire Eximius Design for $80 million which provides solutions and services to build connected products in areas of cloud, internet of things (IoT), edge computing, 5G and artificial intelligence (AI).
Global technology majors have also been betting on acquisitions to make their mark in the cloud space. The most significant one among them is possibly IBM Corp’s $34-billion acquisition of Red Hat last year, to further its hybrid cloud agenda.
Cognizant Technology Solutions Corp has been on an acquisition spree to grow its cloud portfolio, a significant portion of the digital business.
“Digital creates an enormous opportunity for Cognizant and we intend to capture this. We have complemented organic investments with a targeted M&A strategy focused 100% on digital,” said Brian Humphries, CEO, Cognizant.
The Nasdaq-listed company which employs more than 200,000 employees in India, has already made six cloud-related acquisitions this year – Code Zero, EI Technologies, Lev, Collaborative Solutions, New Signature, and 10th Magnitude.
Cognizant, yet to declare its July-September earnings, saw its digital revenues contributing 42% of its total revenues and growing 14% y-o-y for the June quarter. Infosys’ digital revenue for the quarter ended September grew 25.4% in constant currency terms and contributed 47.3% to the total revenues.
IT services companies are placing big bets on digital as customers are opting for cloud-based online services and remote working platforms. According to Fitch Ratings, IT services companies that focus on digital businesses such as automation and cloud-based service delivery, are likely to perform better than those with a focus on business process management (BPM) and legacy application and infrastructure services.
Infosys CEO Salil Parekh said during the Q2 earnings in October that digital will soon contribute as much as 50% to the total revenues, as investments made in digital over the last few years are starting to bear fruit.
