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IT majors find overseas deals too risky to stride
Wednesday, 21 April 2010, 22:14 IST
New Delhi: India's outsourcing giants, TCS, Infosys, and Wipro were trying to improve their profile and compete better with bigger competitors like HP and IBM. Now they are caught in a dilemma of whether to sacrifice profitability and gain market share by buying large firms that can boost the topline multi-fold.
Investment banking firms were holding hectic meetings with TCS, Infosys and Wipro proposing M&A opportunities such as CapGemini, Atos Origin, and Logica, among others. Now, Indian tech firms are realizing that such acquisitions would not only be too heavy to pull off, but also bring complexities that could affect their profits and double-digit growth rates.
"Why would they acquire troubled companies - all they would be getting is headaches and huge cultural disconnect," said John McCarthy, Principal Analyst and Vice-President at US headquartered Forrester Research.
European services firms are struggling to trim their high cost payroll and increase offshoring to cheaper locations such as India. "In Europe, when you lay off someone it's very expensive and you try to delay it, that has a weight on margin," said Paul Hermelin, Group Chief Executive, Capgemini.
"We do not plan to build large empires of hardware and services, and it's not about being risk averse. We want to bite what we can chew," said the chief executive of a top Indian technology firm. He requested anonymity because his company is in a financial silent period.
Compared with some of their top European rivals scrambling to push their operating margins to double digits, the top three Indian tech firms boast of margins well above 20 percent. "Last year, Infosys has earned more net income than the entire European IT services industry," said Peter Schumacher of European strategy consulting firm Value Leadership.