Why Are Indian IT Firms So Shy to Buy?
They have accumulated piles of cash so you would think top Indian outsourcing firms such as Infosys Technologies (INFY) and Wipro Ltd (WIT) would go hunting for sizeable acquisitions in the current market.
But when it comes to exploring buying opportunities, India's top outsourcing companies have been bashful suitors. Despite the heightened anticipation caused by the cash on their balance sheets—Infosys for instance has $2.8bn on hand—not a single blockbuster, billion-dollar deal has gone through so far.
Historically, India's $60bn outsourcing sector has grown rapidly, with companies adding thousands of employees each quarter. The top three Indian firms each have around 100,000 employees in large tech hubs such as Bangalore and smaller cities such as Jaipur and Coimbatore.
Companies such as Infosys are still expanding at a searing pace. Its executives say the company will add 18,000 new employees in India in the next year. That number is larger than most potential acquisition targets.
So why are Indian outsourcing firms acquisition-shy?
There is a clear feeling that it's cheaper for firms to grow organically than to spend their money on expensive buys—since acquisition targets can command a hefty premium.
The collective behaviour of Indian outsourcing firms has leaned towards short-term investor focus as opposed to long-term growth strategies, says Avinash Vashistha, global managing partner of consultancy firm Tholons.
Also, because of their superior financial performance over the years, these companies are now saddled with high growth and margin expectations each quarter. It would be hard to find any potential targets that could meet those goals.
So outsourcing firms have looked for small, strategic acquisitions that are viewed as less risky than mega-deals. Such low-risk buys have helped fill service gaps and cover new geographic territories.
For instance, TCS (TCS.NS) bought the local unit of Phoenix Global Solutions for an undisclosed sum, and Wipro acquired Infocrossing for $600m.
Such acquisitions have helped India's outsourcing companies to consolidate in specific verticals and select territories, thus serving to de-risk and balance their portfolios.
But now, as technology spending rebounds, aggressive M&A could help firms grow quickly.
In an industry where heft matters, acquisitions could help bigger firms such as Tata Consultancy and Infosys emerge as single-stop service providers.
Competition from multinational players such as Accenture (ACN) and IBM (IBM) is increasing. These large operators offer a wide range of services under a single umbrella.
But acquisitions are a strategic activity that should be undertaken very carefully, SD Shibulal, Infosys' COO, told silicon.com. They are complicated to execute so nothing should be done in haste, he said.
Infosys is evaluating multiple acquisition targets at any given time. "When we find a company at the right valuation which fits our strategy and is the right size—typically a company with up to 10 per cent [of Infosys'] revenue—we will look at acquiring the company," Shibulal said.
Smaller outsourcing firms such as Bangalore-based MindTree (MINT.NS) have adopted the M&A strategy quite sparingly. MindTree's acquisition efforts have been driven by strategic options rather than as a means to gain scale, CEO Krishnakumar Natarajan said.
Yet Indian outsourcers should start viewing M&A as a distinctive competency and put in place appropriate processes to integrate buys and build their value quickly, Krishnakumar said.
That is easier said than done. For now, Indian outsourcing firms are still being coy about getting into acquisition mode.