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The acquisition of French IT services firm Alti by Tata Consultancy Services (TCS) is clearly not a big one, going by the deal size (euro 75 million) and the company's revenues. The French company closed 2012 with revenues of euro 126 million ($171 million), compared to the $2.6 billion TCS clocked from its European operations. Europe accounts for 26 per cent of TCS's overall revenues and has been growing at a compounded annual growth rate of 23 per cent over the last two years. Compare this with the 10.2 per cent headline growth the software services sector is set to clock in FY13 through exports.
Undoubtedly, the financial impact of this acquisition is expected to be small, it's a tuck-in deal that will give significant mileage to TCS. A tuck-in acquisition (also known as a bolt-on acquisition) is one that gives significant comparative advantage to the acquirer but at a lower cost. So, though the acquisition of Alti may be a small one, it has the potential to throw open opportunities in the fifth-largest outsourcing market in the world. Achieving this without the acquisition would have taken TCS a lot more time and money. Rumit Dugar, IT and telecom analyst at Religare Institutional Research, says: "The acquisition is about presence in a market and TCS will use it as a base to grow its presence in France, where offshore penetration is relatively low. It's a good tuck-in acquisition."
Even though Europe is a big market in the outsourcing sweepstakes, top companies in Continental Europe have been reluctant to move application and maintenance work to offshore locations like India. However, this has changed after the sovereign crisis in Europe over the last two years. Corporations in Europe are far more willing to outsource maintenance work now than they were a few years ago as it can cut costs by 70 per cent. This growing affinity towards offshoring is reflected in the growth rates of Indian vendors in these geographies. Going by the quarterly run-rate in Europe, TCS is expected to exit FY13 with gross revenues of $3 billion from its European operations.
From this point of view, Alti's acquisition becomes critical as it will give TCS access to the $30-billion IT services market in France, which is the third largest after UK and Germany. France is the fifth largest IT services market globally after the US, Japan, the UK and Germany. And Alti's clients include the top 10 companies of the CAC 40, the benchmark French stock market index. TCS has a substantial presence in the UK and Germany, but penetration into France required a local presence and this acquisition gives TCS that foothold. According to Emkay Global, though there's no meaningful financial upside for TCS from this deal, the company will get a first mover advantage in a market that has so far been averse to outsourcing to global vendors. This deal will help TCS fortify its position in Continental Europe.
