Mergers &Acuisitions

What Motivates Indian IT companies to go for inorganic growth

Recently there has been a trend for the IT companies to make acquisitions abroad. This articles looks why strategic acquisitions make sense and the reasons the Indian IT companies are following the inorganic path for growth

* Gaining access to key markets and customers, building delivery capabilities and domain expertise, expanding business into a new geographical area or enhancing a particular type of business expertise would further the growth of the company and are drivers for M&A. Giving credence to this is the fact that many Indian software companies have acquired foreign companies. This way, they have gained access to overseas markets, specifically to key customers in verticals such as banking and finance, transportation and telecom.eg: The acquisition of Sydney-based $22 mn core-banking solution vendor Financial Network Services (FNS) enabled TCS to offer core-banking solution globally and compete against Infy's Finacle and Flexcube from Oracle's i-flex.This acquisition helped TCS to penetrate the Australian market.

* Industry experts believe that most companies have some gaps in their solution portfolio. Today's customers are looking for end-to-end solution providers who can offer an entire gamut of services. M&A therefore, becomes a preferred vehicle to complete solution portfolios, if they want to want to retain a customer. eg: Spectramind, Wipro's BPO arm, gets around 10 percent of its revenues from Wipro clients and according to Singh, this will go up. A comprehensive BPO offering coupled with an established clientele in IT services will help Wipro in bidding for bundled contracts.

* If there are any unique tools or skill sets in a particular industry, then companies could consider mergers or acquisitions for value addition in the niche area. This would help them stay ahead in the competition for being the best. For eg:Wipro acquired New logic ,the Austrian chip designing company. The New Logic acquisition further bolsters Wipro's R&D expertise and geographic advantage in Europe-with 32% of its revenues in FY05 coming from R&D and boasting of customers such as Infineon and Philips, this has been Wipro's key differentiator from TCS and Infosys.

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* The need to balance the portfolio of product/service offerings and hence be better prepared for industries, which have cyclical demand for products and an increase in market capitalization and consequently shareholder value for listed companies are other reasons why companies would go in for M&A.

* Synergies between the companies and their product/service offerings, their complementing strengths and market reach of companies in terms of geographic spread and products/services