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IT - ITeS firms put mergers and acquisitions (M&A) in fast lane
April, 14th 2011

With growth back on track, the $71-billion IT-ITeS industry is now opting for mergers and acquisitions (M&A), with higher revenues, a presence in different geographies and newer service lines in mind.

The past three months alone have seen big-ticket acquisitions Genpact buying Headstrong and Igate Patni,with deals ranging between $500 million and $1billion.

There have been low-profile acquisitions too, including that of Wipro-SAIC, Capgeminis buy of two French companies and HOV Services clubbing with Sourcecorp.

On April 6, the countrys largest BPO, Genpact, acquired US consulting and IT services firm Headstrong for $550 million,the biggest acquisition in the BPO space so far. The deal clearly brings Genpact into the IT services business, along with greater presence in the US.

Pramod Bhasin, CEO and president of the company, said, We want to have our centre of gravity closer to customers and clients in the US and UK. Headstrong presently has 60% of its employees onshore, which will help us build the onshore capability further. Headstrong CEO and president Sandeep Sahai gives his perspective on the acquisition. He said, We had a lot of clients in the capital market, but it has never been enough.

We wanted to have delivery centres across the globe and build key leaders in analytics, KPO and re-engineering. We will have a global reach in the US and Asia as well for end-to-end services in IT and BPM integrated. Headstrong generated revenues of approximately $217 million in 2010 and Genpact expects Headstrongs long-term growth rate to be in excess of 20% per year. This could take Genpacts yearly revenues to $1.5 billion.

Sangeeta Gupta, senior vice-president of Indias apex software body, Nasscom, said, Large IT contracts are preferential towards larger companies and another reason for these acquisitions is to integrate IT and BPO capabilities and not just scale.

The $1.2-billion Igate-Patni deal, which has been the trigger of all acquisitions, was mainly for reasonsof scale and IT-BPO integration. It was also owing to the mismanagement of Patni as a company, say analysts. Both the companies were of similar scale, in terms of revenues, before the acquisition.

Nikhil Rajpal, partner, Everest Group, a management and consulting firm, also feels, These acquisitions happen more for strategic reasons rather than scale. The tier-I IT-ITeS companies are growing at a rate of 30%.

Though some of the top performers in tier-II companies are able to match the tier-I league in growth, the laggards in tier-II bracket, growing at an industry average rate of 18-20%, are now getting acquired.

Recent times have seen many companies opting for mergers and acquisitions to enter a new geography or add a new service line and have nothing or very less to do with scale.

Take for instance IT company Capgemini acquiring French companies Artesysand Avantias for $56.9 million.

Artesys develops information technology infrastructure, while Avantias specialises in enterprise content management. Similarly, Wipro Technologies signed an agreement to acquire the oil and gas IT practice of Science Applications International Corporation (SAIC) for an all-cash consideration of approximately $150 million, subject to adjustments.

As a result of the transaction, approximately 1,450 employees are expected to transition to Wipro across North America, Europe, India and the Middle-East.

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