Baring's move to buy 30% stake in NIIT Tech reflection of a new trend

The PE firm's move to buy 30% stake in NIIT Technologies is a reflection of this new trend in the infotech space

As the IT services industry evolves, consolidation is becoming the name of the game in the mid-tier space.

Baring Private Equity (Asia)’s move to buy 30 per cent stake in NIIT Technologies is a reflection of this trend. As Baring’s current portfolio has another mid-tier IT firm — Hexaware Technologies — industry experts are of the opinion that integrating these two companies could bring about the required scale and synergy.

“The IT industry is getting commoditised, and as a result, the consolidation process has been happening across the industry in recent years. We have seen many small companies converging in the past,” said V Balakrishnan, chairman of Exfinity Venture Partners and former CFO and board member of Infosys. “So, in case of NIIT and Hexaware, it is a strong possibility in the coming years,” he added.

Last Sunday, Baring Private Equity (Asia) and funds associated with it entered into an agreement to buy 30 per cent stake in the mid-sized IT firm for around Rs 2,627 crore. As acquisition of more than 25 per cent stake triggers the mandatory open offer option, the fund house will also have to undergo this process to buy an additional 26 per cent stake from NIIT Tech’s shareholders soon.

The deal came at a time when L&T mounted a takeover bid on another mid-tier IT services company, Mindtree, to acquire controlling stake in the firm. The engineering services firm has also given an indication that it may look at integrating Mindtree with its portfolio company, L&T Infotech, after both reach a certain scale.

“Both NIIT Tech and Hexaware have distinct capabilities. In case of NIIT Tech, the company has performed well with the new strategy of focusing on three verticals under its CEO Sudhir Singh. For Hexaware, apart from banking, financial services and insurance (BFSI), the IT firm has a sound presence in the manufacturing vertical as well,” said Pareekh Jain of Pareekh Consulting. “Integration of both companies will depend on the performance of these two firms. If both continue to do well, then Baring may look at running them as independent entities,” he added. In an earlier interview with Business Standard, Singh had said the company received commitment from Baring not to consolidate it with other portfolio companies for two years.

As pros and cons of a possible integration of these two firms are being weighed by Baring, many brokerage firms have said that consolidation would benefit both the IT companies. According to these firms, the combined revenue of NIIT Tech and Hexaware would be around $1 billion. So, both the firms can benefit from their complementary capabilities, in case of integration.

“Both Hexaware and NIIT Tech have strong presence in the BFSI vertical. For NIIT Tech, BFSI contributes around 45 per cent of its revenues, while the figure stands at 42 per cent for Hexaware,” a report by Prabhudas Lilladher stated. 

“However, potential synergies could exist in transportation, from which NIIT Tech draws around 26 per cent of revenues with marquee clients, and manufacturing, from where Hexaware draws around 15 per cent of revenue,” the report added. With the acquisition of a stake in NIIT Tech, Baring and Baring Private Equity (Asia) have again shown their aggressiveness in the Indian IT services space.