Every year, the purveyors of M&A talk up Indian IT services sector triggering a big overseas buyout. With the outbound deal activity picking up, and the IT industry's unbridled growth and profitability under pressure, the debate continues whether the sector should be pursuing takeover-led growth seriously now.
Ranu Vohra, MD and CEO of Avendus Capital, arguably India's most prolific IT dealmaker over the last decade, believes India's IT sector is still away from from effecting big-bang cross-border acquisitions and being part of industry consolidation moves globally. "The discussion surfaces every year, about a big global acquisition from Indian IT happening. But I think this is still some distance away," he says, in a conversation with VCCircle.
Vohra, who is steering Avendus into the big league of investment banking after Satyam Computer deal, explains that "most Indian IT players still lack a broad strategic approach to their M&A pursuits. They tend to effect buyouts depending on the business flow - an immediate fire fighting move, for instance, a tuck-in acquisition in Japan or a SAP asset depending on revenue traction".
India's IT enabled services industry continues to approach buyout opportunities from its own comfort zone, and that needs a change before pursuing large global acquisitions, Vohra adds. Avendus Capital's Executive Director Amit Singh, who heads the firm's IT and BPO practice, thinks "the focus of the larger Indian players is on specialized assets so as to help them have a well rounded services portfolio or to expand in a certain geography".
While it may be hard to justify pure bulking up strategy currently, the situation would be changing as the industry matures and global players ramp up their Indian operations, putting pressure on the
profitability of domestic majors. "The two historical advantages for Indian players have been ghrowth and profitability. When there is pressure on profitability, then you are left with growth for which scale in important in a matured industry. Just to put matters in perspective, an Accenture’s revenue is still greater than the revenues of TCS, Wipro, Infosys and HCL put together and Indian majors would eventually have to look at bridging this size gap," Singh argues.
The global IT enabled sector has seen consolidation unfold in the last 24 months beginning with Hewlett Packard's $13.9-billion acquisition of EDS, followed by other multi-billion dollar deals involving Dell's buyout of Perot Systems and Xerox snapping up Affiliated Computer Services. A muted economic environment, when the outsourcing model invariably gets rejigged, is better suited for consolidation moves even as the danger of over-paying is an unlikely one.
India's software and business process outsourcing exports are expected to touch $50 billion in fiscal (2009-10), an increase of 5.5%, said industry body Nasscom last month. For 2010-11, IT and BPO exports are expected to grow at an annual 13-15% to reach $56-57 billion.
The top five of Indian IT placed its bet on organic growth - a strategy that worked well in the boom years when some of them added nearly a billion dollars to their top line annually - as they firecely guarded the high margin offshoring play. In the past, analysts reports and brokerage firms have linked Indian majors to some of the bulky and slow-paced IT giants in continental Europe (some of them are being seen as perennial M&A targets), but it requires a creative approach to
deal-making and involves tenacious integration challenges in a people and knowledge centric industry.
Some of the largest acquisitions by the Indian IT majors in last three years include Wipro's $600-million deal to buy Nasdaq-listed Infocrossing, Inc in 2007, HCL Technologies' acquisition of Axon Group plc for $657 million and Tech Mahindra's $591-million acquisition of fraud-hit Satyam Computers in 2009.
Also the IT firms, which usually relied on their cash reserves and used very little debt, are also opening up to leveraged deals. The two recent large deals by HCL and Tech Mahindra involved raising of debt to fund the deals. This as compared to the Infocrossing deal by Wipro which funded through cash reserves and internal accruals.
Vohra says Indian IT might have seen some opportunity pass by. "These are times when equity cheque is required to work on acquisitions and IT firms in general have been sitting on cash. Some of them are late already from that perspective," he explains. " The leveraged buyout market, as we knew it, is over, at least for the time being, and one needs capital to pursue deals. One probably needs to look at corporates who raised capital last year (a slew of them raised funds through QIP) while mapping M&A appetite.
Look at Sree Renuka Sugars, which recently did a buyout in Brazil, having raised cash last year,"
Vohra adds. He also echoes sentiments gaining ground that dealmaking in IT will be dominated by transactions in the $50-$200 million band in the near future. Small and mid-market assets in the US, for instance, are coming to the deal table seeing valuations recover after tough two years.
This could throw up opportunities for mid-tier Indian IT, if they get the their act together, to step up inorganic growth hunt. "I anticipate more action in the midcap segment, where leverage would be critical to effecting a sizeable buy. Overall, the liquidity situation today is an order of magnitude different from the situation at the beginning of the year, so that is good news for M&A," Singh says.
Another area of activity would be BPO where, according to Vohra, "lot of buy mandates are hitting the market".
Vohra co-founded Avendus Capital ten years back with Gaurav Deepak and Kaushal Kumar, as a boutique investment bank focused on Internet economy and the IT enabled ecosystem. Over the years, Avendus has shaped up into a full-fledged institutional financial services firm focused on investment banking, institutional broking, private wealth and alternate asset management. Last year, Avendus hit the high point, when it was called to advise on the sale of the fraud hit Satyam
Computer Services, one of the largest buyouts in Indian IT, and possibly India Inc's most talked about deal in 2009.
"We have done 45 deals worth over $3 billion in the last three years. So I can well argue that Satyam was just one of those deals. But, yes, it has changed a lot of things for us. Primarily, the interest level in us and the size of opportunities that come along now," Vohra explains. "This question always crops up and I guess would continue to do so till we do our next big deal. But people often forget we have been a consistent performer in terms of the number of deals," Singh
adds. Avendus Capital's investment banking play is now sector agnostic and spread across verticals such as consumer, industrials, life sciences, real estate, infrastructure and financial services, besides IT and BPO.
