Mergers spice up IT market

Twenty four of the 30 mergers and acquisitions that have taken place in the information technology sector during the first 10 months of 2005 have been cross-border deals with international companies paying a premium to acquire Indian firms. Indian IT companies, on their part, acquired firms abroad to access a ready customer base.

"The average revenue multiple (purchase price/revenue) for deals where foreign companies have bought Indian firms works out to 1.38, while it is only 1.15 when Indian IT companies are buying international firms," HV Harish, head of mergers and acquisitions at Grant Thornton India, said.

"The trend of foreign companies buying Indian IT firms is beginning to spread to mid-sized and smaller companies, and we expect to see a lot more action in the next few years. They are buying Indian IT companies to expand and improve profitability," he added.

While foreign companies are aiming to improve long-term profitability by accessing Indian skill sets, Indian IT companies are driven by the need to have local presence in overseas markets. Indian firms are finding relatively cheaper deals as they are also scouting for companies, which may not be very profitable but have a good customer base.

Increasingly, Indian companies are turning to acquisition targets beyond the traditional markets of North America and Europe. Half of the overseas acquisitions by Indian companies has been in countries other than North America, with the Asia-Pacific region accounting for as much as 25 per cent.

"We were looking for a specific product portfolio and the Australian company, Financial Network Services, suited us the best," N Chandrasekaran, TCS' head of global sales and operations, said referring to the $26-million deal for a 100 per cent buyout of the company.

The Indian IT space is still to see a lot of action in all-Indian deals. Seven deals have taken place in 2005, with the acquisition of vMoksha by Helios and Matheson being the biggest at $19 million. The consolidation in the domestic space is expected to gather pace in the near future as small and mid-sized Indian IT firms will focus on growing in size.

The deal between Oracle and i-flex, the biggest international IT agreement this year, has turned out to be an exception vis-a-vis pricing with the revenue multiple working out to a steep 5.54. Oracle had announced that it had purchased 41 per cent of the stake of i-flex from Citigroup and 20 per cent through an open offer.

While IT has continued to dominate the M&A space, it has also seen significant action in the private equity space in the first 10 months of 2005 with four deals.