European firms eye Indian IT cos

Valuation of Indian IT firms has come down by 20-40 per cent.

Since the valuations of IT firms are coming down considerably, European firms are eyeing Indian firms for acquisitions. Valuations are down by 20 per cent among the tier-I companies and by over 40 per cent among mid-cap firms.

Valuations for US-based firms are down by 10-15 per cent, say analysts and investment bankers. Moreover, turbulence in the Indian secondary market has seen the Sensex dip by over 20 per cent since its January peak.

Analysts feel that European firms are looking at India as they desperately need to upscale in order to be ahead of the competition.

"European firms are considering Indian IT companies for acquisition as they have no other option but to grow inorganically. Also, India brings in a strong offshoring 1capability," says Saurabh Agarwal, MD, global markets and investment banking, DSP Merrill Lynch.

A recent instance of this trend was the acquisition of UK-based Xansa by France-based Groupe Streia.

Francois Enaud, CEO, Streia said, "While evaluating Xansa, we were impressed to see that it is one of the first European companies to have invested in India. We feel that India will be a bridge for us to access the APAC market."

Avendus Capital, an investment bank, is in talks with European firms interested in mergers and acquisitions (M&A) in India.

"Valuations are certainly a factor, but a lot also depends on the strategic intent of the European firm. If they want offshoring capability, then valuations will be factored in. If they are looking at other aspects like vertical or niche focus and skill sets, then the deals will attract a premium. We are looking at budgets of around $100 million for acquisitions in offshoring capabilities," says Ranu Vohra, MD and CEO, Avendus Capital.

A handful of European firms have taken to offshoring in a big way. Some of them are Capgemini, Xansa, Logica, and Atos Origin.

Firms like Capgemini, CSC and EDS have also sought acquisition in India to increase their base here. Atos Origin, the Euro 5.8 billion IT services firm, has recently said that it is looking keenly at acquisition in India.

The need to acquire also stems from the fact that a lot of European firms in the recent past are beginning to consider offshoring.

"A lot of vendors thought that their clients will prefer only a European vendor but some of the large deals recently have come from Europe. In fact, we feel that M&A or a partnership route will be preferred by many European vendors," says Sudin Apte, senior analyst and country head, Forrester (India).

He also said that, based on talks with some clients, the percentage of companies interested in offshoring in continental Europe is increasing.

The recent announcement of Cognizant Technologies taking over the India operations of Deutsche Telekom's enterprise customer subsidiary, T-Systems, is yet another example of a European firm partnering with an Indian IT services company to access new markets.