Avinash Gupta, leader, financial advisory and senior director, Deloitte India, said that the gap between large Indian IT companies and the rest is widening and the only way for mid-tier/small companies to grow in size is through consolidation.The me-too business model has led to little differentiation in offerings. That does not leave these firms very relevant in the current scenario.
Sanjay Dhawan, leader (technology), PwC India, said that the industry is going through a rough patch with customers taking tougher measures. "There is rising pressure on smaller companies to exit," he said.
Another big push towards consolidation is being driven by the key customers of these companies, who do not see much value in being associated with smaller firms in these times. A recent example is the ongoing sale of Polaris Financial Technologies, which has put its IT services division on the block, evincing the interest of several IT majors such as Infosys, Mahindra Satyam, HCL Technologies and L&T Infotech. The proposed sale of Polaris' IT services division is driven largely by its largest customer and stakeholder Citigroup, which, besides looking for exit valuation, would be more comfortable with services being provided a larger IT company.
Similarly, another midsized IT services company MphasiS is also being talked as a possible buyout target with the parent firm, Hewlett Packard, planning to put its 60.5% on the block.
These two deals could mark the beginning of a long phase of consolidation among small and mid-tier companies it could be the most viable option for them to survive and grow. Many of these companies are dependent largely on a single account. At the same time, many Indian IT companies are looking at foreign destinations for acquisitions to bump up their portfolio. Dhawan said companies are looking at acquisitions not for growing in size, but because they are interested in buying technology, customer access and newer markets.
Recently, TCS announced the acquisition of French firm Alti for 75 million euros, which would give the company deeper access in a tough market like France. Wipro also acquired Australian firm Promax to enhance its capabilities in analytics.
According to Deloitte's Gupta, a large number of Indian IT companies are interested in moving up the value chain and this could be done faster through acquisitions.
Besides, there is growing pressure from the key market of the Indian IT industry the US where the proposed immigration bill may force several companies to increase their local presence. This could be done largely through acquisitions.
However, there is also a word of caution around M&As given the current economic scenario, with companies becoming more circumspect about the inorganic route. The PwC MoneyTree India report for the first quarter of 2013 on private equity investments said that the IT and IT-enabled services (ITeS) sector emerged as the leader in terms of volume of deals, which amounted to $105 million from 26 deals. However, the sector witnessed a fall of 40% in value and 28% in volume from the preceding quarter. This drop has been attributed to the uncertain macro-economic and political environment and investors critical evaluation of their existing business/revenue models.