Buyout craze grips Indian IT companies

NetScribes/Ganesh Ramamoorthy

India's infotech brigade is charging down the acquisition path. In the last six months, Indian software companies have closed a total of $125 million worth of acquisitions. The acquisitions, involving a mix of stock and cash, have all been US-based companies.

SSI shelled out $64 million for AlbionOrion; DSQ Software paid $30 million to acquire SanVision, while Aptech acquired Specsoft for $10 million in three of the most prominent deals over the last two quarters.

Though the SSI deal has been the largest till date, analysts say the real big one -- from Infosys -- is yet to come.

The acquisition bug has spread across the breadth of the Indian software world affecting heavyweights like HCL Tech and Wipro as well as the smaller ones like Sonata, BFL, SSI Aptech and Hughes Software.

Analysts are not surprised. "This is just the beginning. More will follow as companies begin to consolidate their local and global operations," says Sagar Tanna, fund manager at Asit C Mehta Brokerage.

Certain key drivers are propelling the acquisition mania: global expansion and the need to reduce revenue dependence from a particular region, the desire to move up the software value chain and business restructuring.

Companies like TCS, Infosys, Silverline, Wipro derive more than 80 per cent of their revenues from the US and, hence, are exposed to the risk of losing revenues when competition picks up.

"These companies need to expand geographically to stay profitable and acquisitions are the easiest way to do it when you don't have much time to market your services," said Tanna.

"Also, Indian software companies derive their high valuations from their expected future performance and better business prospects. While current valuations may seem a bit on the higher side, they may be justified considering the opportunities in emerging areas like e-commerce and mobile commerce. Acquisitions in these areas will, therefore, help Indian software companies to move up the value chain faster," he added.

DSQ Software acquired SanVision, to expand its reach as well as to focus on the emerging e-commerce business.

Aptech acquired Specsoft to not only expand into the US markets but also to move on to high-margin, high-growth areas like knowledge management and technology-based training.

Both companies have also announced acquisition plans in Europe to expand geographically. Sonata, Silverline and SSI are also in the acquisition game to widen their reach.

Companies like BFL and Trigyn, on the other hand, have looked to acquisitions to restructure their businesses. Trigyn acquired eCapital Solutions and its subsidiaries in a stock-swap deal. Post-acquisition, the company has reshaped itself into three business divisions - telecom, e-business and systems applications software.

BFL acquired MphasiS Corporation in a bid to get a toehold in the emerging technologies arena of e-commerce and real time customer integration.

But the acquisition mania seems just one-way. While Indian companies are on a major acquisition spree, US companies do not seem to be doing the same. "US companies are not rushing to acquire Indian companies yet. They are probably waiting for the market to mature," says an analyst with LKP Securities.

US companies might prefer to enter into joint ventures or increase their stakes in existing ventures rather than go for an acquisition right now.

"American companies will be more interested in increasing their stake in existing ventures. Like what British Telecom did in Mahindra-BT or Cummins Inc did in Cummins Infotech," says Tanna.

BT raised its stake in MBT by 3 per cent to 43 per cent, while Cummins Inc acquired a 60 per cent stake in Cummins Infotech, a 100 per cent subsidiary of Cummins India.

However, Tanna believes that second-rung software companies could be ideal candidates for acquisitions by US companies. "That will make sense as it will be cheaper and at the same time they will also get a strong hold in the local market," he says.

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