Cash-rich IT service firms on a shopping spree, eye inorganic expansion

The top four Indian IT firms have cash reserves of nearly $15 billion

The country’s information technology (IT) services companies are utilising cash on their balance sheet to strengthen their digital, cloud and healthcare offerings — the themes that predominantly helped them beat the pandemic-induced downturn.
 
According to experts, while several of the target companies are available at attractive valuations, IT service firms are also eyeing to expand their presence in newer markets through inorganic expansion.
 
Already in the September quarter, top Indian IT services firms including Infosys, Wipro, and HCL Technologies have made several acquisitions, not to mention Cognizant, technically a US-headquartered company.
 
Last week, HCL Technologies announced the acquisition of Australian IT firm DWS for $115.8 million. The move is aimed at helping the Noida-headquartered firm expand its digital offerings, especially in Australia and New Zealand.
 
Similarly, Infosys, announced the acquisition of product design and development firm Kaleidoscope Innovation earlier this month for about $42 million. With this, the company aims to expand its engineering services portfolio and strengthen its presence in medical devices, consumer and industrial markets across the US.
 
Wipro announced two acquisitions in July — Brazil-based IT firm IVIA Serviços de Informática and 4C, a Salesforce multi-cloud partner firm, for around $100 million in total.
 
Experts say IT companies are now seen to be banking on the mergers and acquisitions (M&A) route for geographical expansion and to bolster their growth, a new strategy for these firms.
 
“IT companies have never looked at inorganic strategies to grow in the recent past as most Indian players had been clocking good growth organically. Most acquisitions till now were for enhancing their capabilities,” said Pareekh Jain, an outsourcing advisor and founder of Pareekh Consulting.

“They are also looking for newer markets apart from the US and the UK and ramping up their offerings in healthcare, digital and telecom, which is growing faster amid the pandemic.”
 
Experts also say companies no longer want to bet on legacy businesses, demand for which has been falling consistently. “Business models are evolving. More clients are awarding cloud and digital transformation deals that now account for 40-45 per cent of overall businesses,” said Omkar Tanksale, IT analyst, Axis Securities. “IT services providers are, therefore, targeting companies that have already specialised in these domains.”
 
In a recent interview to Business Standard, Salil Parekh, CEO and MD of Infosys, said the Bengaluru-based company is open to making large acquisitions if the target companies are of “strategic relevance”.
 
During its Q1 earnings call, industry leader Tata Consultancy Services (TCS), too, hinted at big acquisition plans. “Our largest M&A was executed at the peak of the global financial crisis. We are not shy of (making) M&As and we believe that the best time to execute it is when nobody else is buying,” Rajesh Gopinathan, the firm’s CEO, had said.
 
The top four Indian IT firms have cash reserves of about $15 billion, with TCS alone holding $5.9 billion in reserves, followed by Infosys with $3.6 billion, and Wipro with $3.4 billion. HCL Technologies has cash reserves of $1.75 billion.
 
Globally, lower valuations of smaller players are also driving acquisitions. Private equity firms, too, have upped their M&A game.
 
Earlier this month, Baring Private Equity Asia (BPEA) announced the acquisition of Nasdaq-listed IT services and digital engineering company Virtusa for $2 billion.