M&A deals up 12%; Indian cos tap global opportunities
Hindu Business Line, Chennai, December 30, 2008:
The global slowdown in 2008 provided good opportunity for Indian software service providers to cherry-pick attractive companies at reasonable prices - be it to expand global footprint or fill in capability gaps or access new markets. An interesting trend this year was that Indian majors acquiring assets of multinationals with strong operations in India.
The cross border merger and acquisition (M&A) involving Indian IT and IT-enabled companies increased by nearly 12 per cent between January 1 and December 15, 2008 to $3.22 billion (in 98 deals) compared with $2.88 billion (in 159 deals) in 2007. The average deal size in 2008 increased to $32.86 million ($18.15 million), according to Grant Thornton India.
The biggest deals were Citi's sale of its captive BPO unit to TCS for $505-million in October and HCL Technologies buy-out of UK consulting firm Axon for $658 million. Wipro acquiring Citi's Technology Services for $127 million and 3i Infotech acquiring the US-based Regulus Group for $80 million were some of the other major deals during the year.
"Experience from previous economic slowdowns shows that it is possible to emerge stronger from a slowdown using a combination of acquisitions and well-thought investments in capability enhancements," said Mr Siddharth A. Pai, Partner & Managing Director, TPI India.
Clients will 'monetise' their captive units to unlock the value created in the captive units and to leverage the variability and flexibility that service providers can offer. When many captive units were established, the service providers did not have the capabilities the clients were looking for and hence clients had to establish their own captive units in India.
"But now, some clients will move to an outsourcing strategy from an in-house captive strategy and we can expect to see more captive units being monetised," he said.
Less risky bet
While acquiring captive units is a less risky bet for service providers, they will be more circumspect about acquiring large foreign assets as they may not be able to arrange the financing for such deals - if the liquidity conditions in the capital markets do not improve, he said.
According to Mr Sunil Mehta, Country Manager, Quint India, the current slowdown is expected to last for a year-and-a-half or maximum of two years. The impact is higher in US and some European countries.
The impact in India is not significant as of now, but is likely to be more in the coming two quarters. Most big companies with sound fundamentals still are profitable and have enough cash reserves.
This is a good time to look for good companies across the world as valuation will be the lowest now and most of these companies will bounce back within two years. A lot of companies are available for sale as they do not have the required cash reserves and local investors are not willing to put money (as they have no money), he said.
The industry is likely to see more structured transactions of captives and also more consolidation, not only upstream but also within India, to Mr Surjeet Singh, Chief Financial Officer and Chief of Operations, Patni Computers.
Consolidation among Indian companies, especially among mid and small players, can take place provided there is common thinking between the management teams and investor groups concerned. With stock prices suppressed and cash being available at a premium currently, transactions for consolidation will be challenging. However, if companies are able to share a common vision of long term prospects on a realistic basis, then the current times offer good opportunities to share the short terms pains and reap the resultant long-term benefits, he said.
Focus on offshoring
There is much pressure on cost savings and thus more focus on offshoring. However, customers are also keen to have more value through domain knowledge and global support. The lower valuation due to current conditions will be icing on the cake. This is especially true from Europe and Asia-Pac, said Mr Sridhar Vedala, Managing Director, Global Sourcing, EquaTerra, UK.
"We can expect more such deals, especially service providers acquiring captive units, in the next 6 to 12 months," said Mr Pai. The consolidation will be driven by Western clients are looking at vendor rationalisation, and also expecting price reductions from their offshore service providers.
The smaller service providers have limited ability to withstand the multiple pressures facing them - being squeezed out of some client accounts and existing clients extracting pricing concessions. In such cases, it may make sense for smaller firms to merge to compete with larger rivals. Smaller firms may also focus their offerings and compete only in select markets and verticals, he said.
The M&A trend may continue, but the real picture of IT industry and performance of providers will emerge in the second quarter of 2009, said Mr Vedala.