IT cos bet on M&As to accelerate growth

Growth is slowing down in the IT services industry and acquisition is the way to accelerate revenue growth rate. Moreover, Indian IT firms are trying to improve their market shares globally in a declining IT market as they are sitting on sound cash reserve. Engineering and digital are two areas wherein acquisitions are likely to grow - Pareekh Jain, Founder, Pareekh Consulting, tells Bizz Buzz

Bengaluru: Indian IT services firms are activating their deal makers for acquiring prospective companies in order to accelerate their revenue growth rate as a tepid demand environment pulls down their organic growth rates in the last financial year.

According to experts, many IT firms have already announced big ticket buys in recent quarters, sensing that inorganic growth could only supplement their top lines in a declining market. Moreover, comfortable cash reserve and initiatives to build capabilities are the other factors driving the M&A trend.

“Growth is slowing down in the IT services industry and acquisition is the way to accelerate revenue growth rate. Moreover, Indian IT firms are trying to improve their market shares globally in a declining IT market as they are sitting on sound cash reserve. Engineering and digital are two areas wherein acquisitions are likely to grow,” Pareekh Jain, an IT outsourcing advisor & Founder of Pareekh Consulting, told Bizz Buzz.

Last month, Infosys announced that it would acquire in-tech, an engineering R&D services provider focused on the German automotive industry for around $480 million. In January, the Bengaluru-headquartered company announced the acquisition of InSemi, a provider of semiconductor design and embedded services for around Rs 280 crore.

Last year, HCL Tech acquired German automotive engineering services company, ASAP Group for $279 million.

Besides, mid-tier IT services firm ITC Infotech announced acquisition of cloud services firm, Blazeclan for Rs 485 crore (about $60 million). Similarly, Happiest Minds would acquire PureSoftware Technologies for Rs 779 crore (around $98 million), the company said last month.

“In engineering services space, acquisitions have started. The reason behind such M&A activity is that the growth of IT services is going down, while engineering services space is growing in double digits. Companies are realising that they need to do acquisitions for growth like their global peers including Accenture and Capgemini,” Jain added.

While Infosys’ acquisitions are all about building capabilities in automotive, semiconductor and related fields, HCL Tech and Happiest Minds have done big ticket acquisitions for boosting their engineering services and digital capabilities.

According to experts, apart from building capabilities, Indian IT firms are also getting access to a good client portfolio through such acquisitions. Moreover, companies are increasing their geographical presence through such M&A activities. For instance, most of the acquisitions in engineering services space are being done to increase presence in European continent as it is the largest market for this segment.

Sources in the know said sound cash reserve is another factor, driving the M&A activities. Most large companies are sitting on a cash pile, which need to be deployed. As the going gets tough, the M&A team are getting activated to search for prospective buy.

“During good times, Indian IT firms don’t look at M&A seriously. But, the trend shows, M&A activity always surge during tough times,” said a source.