Asia Pacific region accounts for 14% ITO deals: study

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Chennai, Nov 20: Information technology outsourcing (ITO) companies in the Asia Pacific region (APAC) are increasingly looking at mergers and acquisitions to sustain their growth momentum. The region contributes nearly 14% of the total ITO deals that took place between January 2004 and September 2008, said a latest study by Everest Research Institute. There were 114 major M&A deals closed by 34 leading ITO suppliers worldwide between January 2004 and September 2008, the study added.

While half of the M&A deals occurred in North America, Everest analysts observed a fast growth of acquisitions in EMEA region, demonstrating a renewed focus on Europe. In fact, the study has found that M&A activity has been steadily rising among ITO suppliers year-on-year ever since 2004. Among the ITO M&A deal target service lines, Application Development & Maintenance (ADM) and IT Consulting emerged as the hot favorites with 37% and 31% of deals respectively.

Another interesting perspective that emerged from the study is that the average deal size in Europe ($415million) and in APAC region ($325 million) is higher than that in North America ($221 million).

Gaurav Gupta, principal & country head, Everest Group, said: “ITO suppliers are purchasing larger firms in EMEA as compared to other geographies, which explains the highest average acquisition price there. However, it might come as a surprise to note that companies are putting the highest value per dollar invested in firms not in the US or Europe but in acquisitions in the APAC region. While the average multiple ratio for an acquisition in APAC is 2.90, it is 1.41 in EMEA and 1.77 in North America.”

The study also indicated that the spurt of inorganic growth among ITO suppliers is not due to the economic slowdown only. “We have observed six main themes that characterise M&A activities in ITO - enhancement of offshore presence; expansion into newer geographies; acquiring industry-specific skills, especially domain-specific consulting skills; buying into existing book of business (ie, existing client-base); plugging gaps in their service portfolio by acquiring specific IP or skill-set; or consolidating their offshore operations,” Shiraz Ritwik, research director, Everest Research Institute, said. Of these, the biggest levers for a majority of M&A deals have been filling gaps in service portfolio (36%) and acquiring industry-specific skills (35%), he added.