India?s largest software services exporter Tata Consultancy Services (TCS) and fast-rising challenger Cognizant have entered the race to acquire Lodestone Management Consultants, the Zurich-headquartered management and technology consulting firm. Infosys is the other company in the fray.
Sources with direct knowledge of the development have confirmed that all three IT majors have responded to the invitation of bids from the Swiss firm, which has revenues of 207 million Swiss francs. This is perhaps the first time that all the three heavyweights are in a race to acquire a firm.
FE was the first to report that Infosys had entered into talks with Lodestone with an intention of acquiring it. In its report on July 14, FE had said Lodestone could be valued in excess of $300 million, about 1.5 times the firm?s revenue.
The competitive bidding for Lodestone has a lot to do with the present state of the Indian IT industry, which is facing one of the toughest challenges in terms of a slowing market and questions being raised about current business models. A strong consulting, domain or solution capability would certainly give the IT majors a sharper edge in markets such as North America and Europe.
Lodestone?s robust consulting capabilities are something Indian IT firms can definitely do with, something that explains the high level of interest in the company.
The possible acquisition of Lodestone would provide any of these companies the difference in terms of providing higher-value service offerings.
According to an expert in the area of mergers and acquisitions, large Indian IT services companies generally lose out to multinational players like IBM or Accenture in terms providing higher-value services like consulting or solution. He said that the acquisition of a company like Lodestone would certainly bring them higher billing rates.
But since the Swiss firm?s operating margin is in the low double digits, it could be a challenge for the Indian firms to raise it to their own high levels of profitability.
When contacted, a Lodestone spokesperson said, ?Lodestone does not comment on market rumours.?
Cognizant said, ?As a policy we do not comment on rumours or speculation in the marketplace.? TCS did not respond to an email query.
Among the three, Cognizant and TCS have been the most active on the inorganic front, acquiring companies that provide them the scale or domain capability, while Infosys has been extremely cautious. Even the strategy taken by each of them in the marketplace has been extremely different. TCS’ scale of operations with a significant presence in every continent allows it to play at almost every point of the IT services value chain. Infosys has always positioned itself as a premium services player, commanding better pricing than others. Cognizant consciously keeps its operating profit margin on the lower side so as to plough the money back into the business for closer customer connect.