Cash-rich Indian IT services companies go aggressive in M&A space

As capital allocation is altered, dividend payout to dip in the ongoing financial year

As growth slows owing to the pandemic, cash-rich tier-I IT services companies are pursuing organic growth, including acquisition, indicating a change in capital allocation policies.

Apart from mergers and acquisitions (M&As), even large rebadging deals (outsourcing work while reducing employee strength) and buying out captives of global firms are part of these initiatives.

This is being done to drive revenue growth at a time most firms posted a revenue decline in sequential terms in Q1 of FY21, which is traditionally considered to be a strong quarter for IT services companies.

“Most demand is coming from the cloud space, which the Indian IT players have to build up. Secondly, revenue growth is a challenge, which can be supplemented through acquisition. Both are happening, which require allocating capital,” said V Balakrishnan, chairman of Exfinity Venture Partners and former chief financial officer and board member at Infosys.

The top four Indian IT firms have a cash reserve of close to $15 billion. Market leader Tata Consultancy Services has around $5.9 billion, while it is around $3.6 billion for Infosys. Wipro is sitting on close to $3.4 billion, while HCL Technologies has $1.75 billion.

These firms started pursuing M&As since February this year. The most aggressive player has been Wipro, which has announced taking over two firms worth about $100 million this month alone. Both deals have been clinched after its new chief executive officer, Thierry Delaporte, took over on July 6.

Wipro announced acquiring Brazil-based IT firm IVIA Serviços de Informática for $22.4 million on July 14. The acquisition of 4C, a Salesforce multi-cloud partner firm, for around $78 million, was announced last week.

Similarly, HCL Technologies in May announced acquiring Cisco’s self-optimising network (SON) technology in an all-cash deal for $50 million.

Infosys, which acquired Salesforce integration consultant Simplus for about $250 million in February, has indicated it will evaluate possible target firms.

“We have a list of possible acquisition candidates,” Infosys Chief Executive Officer (CEO) Salil Parekh said during an earnings call this month.

TCS has hinted at another big acquisition. “Our largest M&A was executed at the peak of the global financial crisis. We are not shy of M&As and we believe that the best time to execute it is when nobody else is buying,” Rajesh Gopinathan, CEO, said.

“During this time of slowdown, both top- and mid-tier IT firms are doing strategic investment, which is likely to give them growth dividends in the coming years. The investment strategy of most domestic firms is focused on capacity building, maybe through taking over firms or opening centres,” said Pareekh Jain, an IT outsourcing advisor and founder of Pareekh Consulting.

Among mid-tier firms, L&T Technology Services announced acquiring Texas-based Orchestra Technology for $30 million last week.

KPIT Technologies will set up a software engineering centre in Munich, and it will be the largest such facility for the company.

Dividend pay out to shareholders is likely to dip in the current financial year. It fell in FY20 over FY19.