The latest merger between Happiest Minds Technologies and ITC Infotech bears all the hallmarks of what has been ailing the industry for some time now. Many believe this is the beginning of a much more active consolidation cycle, particularly among mid-cap companies.
M&A within the Indian landscape for IT services companies have been far and few. Besides Happiest Minds, the other notable mergers are Coforge buying Cigniti in 2024 to beef up its revenue and L&T buying Mindtree in a hostile takeover in 2019 and merging it with its IT arm L&T Infotech.
Happiest Minds and ITC Infotech is part of the same pattern followed by Persistent to buy Nagarro and Coforge to buy Encora last year, where firms are using M&A to add scale, capabilities, clients and geographic reach much faster than they can organically.
“The market is increasingly becoming build, buy, or be bought. It is getting much harder to remain a subscale generalist when clients want fewer strategic partners capable of taking on larger transformation programs,” says Phil Fersht, founder and chief executive officer (CEO) of HFS Research.
As enterprises look to have fewer IT vendors on board who can provide them with end-to-end offerings and help them in their AI transformation journey, smaller companies are increasingly feeling being left out of large deals where they lack certain capabilities to demonstrate their delivery capacity.
For example, while Happiest Minds is strong in digital engineering, cybersecurity, AI and data, ITC Infotech has its strengths in areas such as SAP, enterprise applications, industry 4.0 and other end to end offerings which bode well for large deals.
“As far as Happiest Minds is concerned, a few of the areas where we've actually left quite a bit of money on the table, there have been quite a few teams where we've helped with some of the digital capabilities or building out their digital infrastructure. The minute it came to enterprise application or an ERP system or SAP, customers would go with some other alternative,” the company’s co-chairman and CEO Joseph Anantharaju told Business Standard.
Similarly, the acquisition of Munich-based Nagarro by Persistent will help the mid-tier company expand its footprint in Europe and create a more balanced portfolio.
All these is happening at a time when AI is pushing down the value of traditional deals and clients look to increase the scope of project work but with less cost. Analysts say that while AI is the catalyst, it is not the only reason. AI is changing the economics of IT services because growth can no longer rely primarily on adding people. Providers now have to invest heavily in AI engineering, data, platforms, domain IP and specialized talent while simultaneously helping clients remove labour from the delivery model.
That creates a scale problem for mid-tier IT firms. While the likes of Coforge and Persistent continue to become bigger with acquisitions and challenge the top five, others in the pack are likely to become acquisition targets, attract private-equity backing, or struggle to justify remaining independent.
Pareekh Jain, CEO of EIIRTrend, says that for AI, companies need to invest in data, platforms, domain IP and specialised talent which is often not possible with the corpus of revenue and capital they might have at given moment in time. “Scaling through merger at least helps you in getting the mind share of the client as bigger companies are always better placed.”
- Smaller IT firms risk being left out of larger, end-to-end transformation deals, incentivising M&A
- M&A helps firms add capabilities, clients and geographic reach faster than through organic growth
- Growth can no longer rely mainly on adding people as AI reshapes IT delivery models
- Firms need greater spending on AI engineering, data, platforms, domain IP and specialised talent
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