INDIA BUSINESS WORLD - APRIL - MAY 2007
The Month that was ...

MID-SIZE IT COS SETTING AGGRESSIVE ACQUISITION TARGETS

WHILE the big five of Indian IT have been shying away from large acquisitions, mid-size IT players have been setting more aggressive acquisitions targets. The Rs 700-crore Mastek Ltd, which recently exited its joint venture with Deloitte Consulting, has earmarked $45 million for acquisitions in the software space. Hexaware Technologies, another mid-size firm, which acquired testing company Focus Frame for $34.5 million in 2006, is now hunting for another $40 million buy.

In contrast, TCS, India's top-ranked software firm, has done only two acquisitions so far-one of Chilean BPO firm Comicrom for $23 million and another of core banking software firm, FNS, for $26 million. Similarly, Infosys, with over $3 billion in revenues, has made only one small acquisition in Australia for around $23 million in 2003.

The largest overseas acquisition to date has also come from a small IT company rather than a large one. Telecom products and software firm Subex Azure acquired Syndesis for $164 million in January this year beating its own record of the largest software acquisition by domestic company when it acquired Azure for $140 million the year before.

Even Wipro, which is known for its 'string of pearls' acquisition strategy has made only nine acquisitions so far, compared to 3i Infotech which has made over 11 acquisitions in 2005-06. Wipro's largest acquisition so far has been for $56 million while that of 3i, which is fraction of Wipro's size, has been $40 million.

"Mid-tier companies that are below $300 million need to attain scale to get invited to the same bids as the big firms. Some of them are focused on certain niche areas and need to build competencies in those areas," said Lakshmi Nambiar, senior associate with Avendus Advisors, which advises on these deals. This is one reason why mid-cap companies have a much higher risk appetite. However, large companies are not under pressure to do acquisitions because they are growing well organically. They also need to more selective in acquiring companies because overseas IT firms typically operate at significantly lower margins, and an acquisition could hit their bottomline. Wipro's chief strategy officer Sudip Nandy has been quoted in many forums as saying the company will do an acquisition of over $50 million in FY08.