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Unlike Accenture & Cognizant, 'build internal scale' approach drives TCS

The JP Morgan report said the investment community had now accepted this conservativeness and culture consciousness practised by TCS

Romita Majumdar  |  Mumbai 

TCS, Tata consultancy services
TCS training center in Trivandrum

IT giant (TCS) has steered away from acquisitions since 2013 with a strong emphasis on building internal scale. Chief Executive Officer (CEO) and Managing Director (MD) Rajesh Gopinathan has time and again reiterated the importance of skilling its workforce but a spike in mergers and acquisitions (M&A) in the recent months, especially those led by global rival Accenture, has raised questions on TCS’s reticence. “This orthodoxy of contrasts with the acquisitive behaviour of peers such as and who have stepped up their acquisition activity a few notches over the past few years,” said in a report last month. In the past three years, has spent about $3.4 billion on M&As, of which around $1.7 billion were spent in 2017. Majority of the 70-odd acquisitions that the NYSE-listed company made were focused on digital and cloud-related businesses. With a market cap of $90 billion, is inching behind Accenture, whose market cap stands at $100 billion. The report said the investment community had now accepted this conservativeness and culture consciousness practised by Their last acquisition was French provider Alti in 2013.

Indian peers like HCL, Wipro and have remained active on the acquisitions front through the years. According to analysts, the acquisitions are not entirely about gaining new customers but about buying newer capabilities and filling the white spaces in terms of technology offering, which is building internally. “Today, acquisitions are more about bringing in a lot of talents in one go as most of these have enough customers,” said Pareekh Jain, senior vice-president, HfS Research. He said unless any of the domestic IT firms made some major acquisitions, the difference in approach would not have an impact on the IT “Our investments in re-skilling the workforce in research and innovation, building intellectual property, products, and platforms are all resulting in good growth in our digital revenues and that is showing in the numbers as well as in the deal flow,” TCS’s CEO and MD Rajesh Gopinathan had said. graph Last year, said around 250,000 employees had been skilled in newer technologies. Gopinathan maintains that the company’s internal capability and the flow of large deals will suffice to grow revenues organically. Ashutosh Sharma, vice-president and research director, Forrester Research, said each of the IT services players had taken a different approach for growth. While some are bringing in design thinking like Tech Mahindra, is focused on core delivery of infrastructure services. “is keen on multi-million dollar transformative deals that go beyond the purview of just ‘digital’ or design thinking,” he added. A report by CB insights last year said while Infosys had been actively investing in start-ups through their $500 million innovation fund, had been pushing innovation completely in-house through nine innovation labs spread across the globe. Both Wipro and Infosys had been actively investing in platforms and services since 2012 with Wipro closing 18 deals during the time, the report said. Equity analysts see a major impact of margin dilution when it comes to acquisitions. “has an EBIT of around 25 per cent, compared to Accenture, which is at 14 per cent. So, the overall impact on margins is much lower for Accenture,” said Madhu Babu, Research analyst, Prabhudas Lilladher. He said had been highly focused on providing dividends and buyback opportunities, which had resulted in their current stance on acquisitions. Ravi Menon of Elara Capital said acquisitions across had to be judged on their merit while accommodating the management’s decisions. “acquisitions have been centered around geographic expansion in the past where the firms had the same billing and compensation models, so it worked for them,” he said.

First Published: Thu, March 08 2018. 06:15 IST