Indian IT too slow on M&As

Bangalore: After the purchase of Perot Systems by Dell and Affiliated Computer Services (ACS) by Xerox, it is further proof that Indian information technology (IT) firms are being caught flat-footed in chasing down opportunities for inorganic growth and achieving scale as the industry consolidates, according to analysts.

Dell with a strong presence in the personal computer and server market, was looking to beef up services with last week's $3.9 billion (18,720 crore) Perot acquisition, reports livemint. Xerox, which is seen as a document management company, wants to switch to technology services. Earlier, in May 2008, Hewlett-Packard (HP) acquired EDS for $13.9 billion to strengthen its IT services offerings.

In the last few months the mergers and acquisition (M&A) process has increased and it indicates that the companies are trying to cope with cuts in IT spending. The acquisition of ACS is likely to impact Indian IT players such as Tata Consultancy Services (TCS), Infosys and Wipro as the company got about 40 percent of its $6.16 billion revenue last year from providing business process outsourcing (BPO) and IT-enabled services to the U.S. government.

Carol DeMatteo, Director, Corporate Communications, ACS said, "It enables ACS, a market leader in BPO, to quickly expand its global reach and benefit from Xerox's technology and innovation." While some of the hardware players have been acquiring services companies to emerge as end-to-end players, Indian IT companies which are primarily in the services business have not yet made any major moves in the market.

Kumar R. Parakala, Head of Global Sourcing Advisory Services at audit and consultancy firm KPMG said, "So far, Indian players have been sitting and watching the deal-making happening on the global scene. The pressure to merge and build partnerships hasn't come to India, yet. But Indian players are sitting on large cash reserves and I would not be surprised to see a tie-up between an Indian IT services firm and a hardware/infrastructure firm."

Hitesh Kuvelkar, Associate Director of Research at Mumbai-based brokerage and investment advisory firm First Global Stockbroking, feels that as valuations have come down with the global market going through the downturn, Indian players who have hitherto been cautious will now look for acquisitions in verticals such as government and healthcare, where they don't have much presence. "This is true, especially in the crucial North American market."

However Chandramouli C.S., Director at IT outsourcing advisory Zinnov Management Consultants, feels that in the immediate term of one to two years, neither the Dell-Perot deal nor Xerox-ACS deal will have any impact on Indian services firm, because integration is a rather lengthy process in such large deals. "However, in the long term, Indian players will need to act decisively to be able to compete globally, especially in the wake of international hardware vendors transforming into services providers and offering single-window solutions for clients," Chandramouli said.

Out of its global workforce of 70,000, ACS employs 5,000 people in India. In March, ACS had shifted about 500 of its employees on to the rolls of Patni Computer Systems in a sub-contracting arrangement.
"There is a real demand from enterprises and governments for the services we can deliver on a global scale. This transaction creates the leading global enterprise for comprehensive document and business process management, and a single provider for enterprises and governments to do the three things that matter most: reduce costs, improve processes, and manage information more efficiently," said DeMatteo of ACS.

ACS in India operates out of five centres in Bangalore, Chennai, Kochi, Gurgaon and Noida.