Mid-cap IT firms see acquisitions as the way forward

26/2/2019

PUNE: Mergers and acquisitions are at an all-time high in the IT services sector in India, be it a large firms like HCL Technologies or mid-cap players. Industry experts think this is the way forward for the sector.

With the world shifting to digital, IT outsourcing firms are in greater need of talent and capability to cater to the demand for latest capabilities such as artificial intelligence and machine learning. According to experts, M&A now is a good strategy, despite the risks.

Among the recent buys are HCL's acquisition of IBM products for $1.8 billion, and Zensar buying Cynosure for 33 million. Stevan Hall, President, Information Services Group (ISG) – Europe, Middle East, Africa, said last year saw highest acquisition of digital agencies by the IT firms last year. "Acquisition pipeline is incredibly healthy," Hall said.

However, Hall agreed that margins could be thin as companies are investing heavily in the space, which also has a long gestation period. The margins could be better if a company has a non-linear revenue model such as revenue-based on outcome-based work, the margins could suffer, he added.

Akhilesh Tuteja, Global Cyber Security practice Co-leader and heads the IT Advisory practice for KPMG in India and the Europe Middle East and Africa (EMA), said: "Time is over when companies can do everything on their own." According to him, at a time when the landscape is changing so fast it is impossible for companies to build everything on their own at a short time. So acquisitions are a logical way to go about despite the risks.

Since 2015, IT firms have been on an acquisition spree in terms of number and value of acquisitions. Bengaluru-based Mindtree acquired four companies between 2015 and 2016 to the tune of $141 million as opposed to seven companies it acquired between 2004 and 2010 under $50 million.

Pune-based Persistent Systems has done four acquisitions since 2015, latest one being Herald Technologies for $5.2 million. Zensar Technologies has made four high profile acquisitions since 2015. The latest one includes the US-based Cynosure for $33 million.

Pointing out the increase in the acquisition pipeline, Atul Nishar, founder and chairman, Hexaware Technologies, said that the biggest investment is happening in digital technologies as the companies want to reach out to the customers faster.

"Artificial intelligence, block chain and data analytics are driving the growth at the moment. If you take mid-cap players many of them are building capabilities in-house. These players are going for M&A for filling the gap or to take a competence to a much higher level. For, it takes a long time to build a platform or product," he said.

Arvind Thakur of NIIT Technologies said in a recent interaction with Moneycontrol that acquisitions are the key pillar of growth for the company and it will always keep an eye out for that. The company itself made two acquisitions since 2015 – Incessant Technologies and RuleTek. As the company expands its digital offerings, they are looking to acquire companies that can offer digital capabilities.