What makes engineering R&D space a target for mergers and acquisitions?

Infosys' acquisition of Germany-based in-tech is the 15th top deal so far

Globally, business engineering research and development (ER&D) spending has experienced a 7-8 per cent compounded annual growth (CAGR) from 2020 to 2023. ER&D spending is expected to grow at an 8-9 per cent CAGR from 2023 to 2030 due to stability in the market and emphasis on digital innovation worldwide.

With the current market size of $1.8 trillion, it is expected to grow to $3 trillion by 2030, fuelled by renewed interest in the segment, demand for digital products and services, and the adoption of new technologies, said the report titled ‘Seizing the ER&D Advantage: Frontiers for 2023’ by Nasscom and BCG. The automotive, software, healthcare, and medical devices sectors are expected to be the top three contributors to the growth of ER&D spending.

The semiconductor industry is also expected to play a significant role, driven by increasing demand and investment. It is anticipated that digital engineering will be the primary driving force behind the accelerating ER&D spending, accounting for approximately 65 per cent in 2030, up from 45 per cent in 2023, according to the report.

In this backdrop, the recent acquisition announced by Bengaluru-based Infosys looks opportune. Earlier this month the IT major announced that it will acquire German headquartered in-tech for Euro 450 million (around $480 million). This will be one of the largest deals for Infosys ever in an M&A, but globally this will be the 15th deal in the ER&D space.

Founded in 2002, in-tech employs 2,200 people in Germany, Austria, China, the UK, the Czech Republic, Spain, Romania and India.

Interesting about in-tech is the capabilities it brings to Infosys, particularly in the context where ER&D globally remains resilient amid the current slowdown in IT spending. For instance, in-tech’s revenue grew at a CAGR of 21 per cent over FY21-23 to EUR 170 million.

Peter Bendour-Samuel, chief executive of Everest Group says the engineering market is one of the fastest growing markets within tech services. “Infosys already has a small but growing footprint in this market but it lacks scale and as the engineering market is evolving scale is becoming more important. There is no way Infosys can catch the market leaders without aggressively pursuing acquisitions, this acquisition fits with this strategy and is unlikely to be the last acquisition they make in this space as they seek to rapidly expand their footprint. We consider this an attractive acquisition and aligns well with the broader Infosys growth agenda,” he said.

This is evident in the first acquisition of Infosys in 2024 announced in January. The company acquired InSemi, semiconductor design and embedded services provider. This strategic investment strengthens Infosys’ Engineering R&D capabilities.

According to a HFS Research blog post the acquisition, it said “Infosys’s acquisition of InSemi prepares it to capitalize on this billion-dollar market by offering high-tech and traditional firms the capabilities to design, develop, and test semiconductors and integrated circuits. By offering these services in-house to its customers, Infosys can design semiconductors needed to optimize data, workloads, and applications.”

Other than Infosys, the only other two IT services firms that used the M&A route to expand their capabilities in the ER&D space is HCLTech. It acquired ASAP for $279 million in 2023. Tech Mahindra acquired CTC for $350 million in 2022.

Analysts say India remains to be a preferred destination for global ER&D sourcing.

According to the Nasscom-BCG report, key ER&D accelerators for India include automotive (xEV, connected vehicles, and infotainment), energy, utilities, oil & gas (climate and sustainability, and digital operations) and MedTech (remote patient monitoring devices and advanced imaging). These will take India’s ER&D contribution from an estimated $45 billion in 2023, to nearly $150 billion by 2030.

Pareekh Jain, CEO at Pareekh Consulting and EIIRTrend said, “In ER&D space only 5-6 per cent is outsourced. Of the total ER&D pie of about $1.8 trillion, only $94 billion is outsourced. Out of that only $25 billion is offshored which will be about 1.5 per cent of the total ER&D pie. There is big headroom to grow for both increasing the outsourcing pie to over 10 per cent and also increasing the offshoring share further.”

It is also a fact that ER&D is growing faster than IT services. Jain believes that going ahead the ER&D space will see more M&A opportunities. “Building engineering capability organically is difficult. More importantly, you also need access to clients. Europe has several small companies in this space who are unable to scale but have marquee clients,” he said.

Indian IT players have also realised that they need to up their game as the ER&D space is being captured by MNC players like Accenture, Capgemini, Hitachi, NTT Data, Deloitte and others. MNCs have cornered about 25 per cent of the ER&D market share.

Top 15 ER&D deals till 2024

Company	Acquired target	Value	Year
Hitachi	GlobalLogic	$9.6bn	2021
Capgemini	Altran	$4.1bn	2019
Adecco/Modis	AKKA	$2.4bn	2021
DXC	Luxoft	$2bn	2019
Altran	Aricent	$2bn	2017
Concentrix	PK Global	$1.6bn	2021
Accenture	Umlaut	$1bn	2021
Harman	Symphony Teleca	$750mn	2015
AF	Poyry	$695mn	2019
Infosys	In-tech	$480mn	2024
Endava	GalaxE	$405mn	2019
AKKA	Data Respons	$400mn	2019
Tech Mahindra	CTC	$350mn	2022
HCLTech	ASAP	$279mn	2023
Infostretch	Apexon	$235mn	2022

*Source: EIIRTrend

Different Engineering Service provider segment market share 2023

Segments	Example	Market share	Growth
Global MNCs	Accenture, Capgemini, Deloitte, DXC, NTT Data, Concentrix etc	25%	Medium
India Broad based	HCLTech, Wipro, TCS, Cognizant, Infosys etc	13%	Medium
Indian Pureplay	LTTS, Cyient, QuEST, Persistent, KPIT, Elxsi	14%	High

*Source: EIIRTrend