Wipro goes from size ?S? to ?XL?

The acquisition of the $229 million, Nasdaq-listed Infocrossing Inc. by the Bangalore-based Wipro Ltd for a consideration of $18.70 per share was significant in a number of ways. Not only was it one of the largest overseas acquisition by an Indian IT services company at an enterprise value of $600 million (or Rs 2,430 crore), it was also the biggest buyout for Wipro so far.

At a 13% premium over Infocrossing?s six-month average share price, Wipro, it seems, was dead set to stake its claim to the New Jersey-based company. This it did by raising the glass ceiling that it has set for M&A transactions.

Most of Wipro?s earlier deals have hovered in the region of about $30-70 million. The company till date has acquired a total of 12 entities in the IT space, eight alone in the last two years. Infocrossing is the ninth acquisition by the company. But, unlike the others, which have been small-ticket transactions, meant largely to fill gaps in its portfolio of services, this one is big. In fact, the Infocrossing acquisition is the second transaction after the buyout of Unza by the consumer care & lighting division of the company in July this year to have crossed the $100-million-mark in terms of its overall size.

Unza, was acquired for $246 million (or Rs 1,010.2 crore). This implies that Wipro?s risk appetite has grown over the last few months. It?s no more diffident about executing large deals, as articulated by Sudip Nandy, chief strategy officer, Wipro, ?We have been saying for sometime now that we will go in for larger acquisitions. However, the ?string of pearls? strategy will also continue.? Says Suresh Senapaty, executive vice president (finance) and chief financial officer, Wipro; ?Our strategy has been to supplement our organic growth with acquisitions. We are not likely to deviate from this, which is why size doesn?t quite matter.?

Though company executives maintain that it is pressing business needs that are driving Wipro?s M&A policy, analysts are of the view that purchasing small entities may not be in the best interest of the company, going forward. A JP Morgan report following the Infocrossing acquisition says, ?This one as well as the Unza deal before reflects a shift in the management?s strategy. They are looking at larger acquisitions necessitated by Wipro?s lagging growth profile to peers.?

Standing at number two in the pecking order of Indian IT services companies, with total revenues of $3.5 billion (or Rs 15,000.8 crore at an exchange rate of Rs 43.10 to a dollar) in the last fiscal?marginally higher than archrival Infosys? $3 billion for the same period?Wipro has had to take the inorganic path to growth quite early in its drive to acquire critical mass. Acquisitions, however, contributed only 3.34% (or Rs 501.1 crore) to the company?s topline in FY07, implying that the former has done nothing much to perk up numbers for the giant though the company has been able to plug crucial gaps in its portfolio. In the last 24 months, the company has spent some $1.3-1.4 in cash on acquisitions alone, obtaining skill sets in areas as diverse as business communication solutions (3D Networks Pte Ltd), Oracle retail solutions (Enabler Informatica SA), computer-aided design and engineering services (Quantech Global Services), technology infrastructure consulting (cMango) etc. Infocrossing gives the company a foothold in the burgeoning infrastructure management services business – giving it instant access to the latter?s on-site contracts, data centre in the US etc. All of these capabilities no doubt will go a long way in helping Wipro cement its position as a serious technology services provider, which has been its core area of strength. ?Wipro has traditionally focused on technology solutions in contrast to TCS and Infosys, which have primarily focused on application maintenance and management,? says Ashish Basil, partner, transaction advisory services, Ernst & Young.

But the drive to move up the value chain has meant that Wipro has chased companies aggressively abroad which has had some impact on its profitability. ?Our operating margins have been hit by about 1-1.3% in FY07 on account of investment in acquisitions. The earnings before income tax (EBIT) as a percentage of sales is lower in the case of the companies acquired, which is why the impact,? says Senapaty.

By some estimates, margins tend to be on the lower side with most overseas companies, so a string of small buys involving them does nothing much to improve the topline and bottomline of the entity acquiring it, though integrating these units with the parent is not difficult at all, given their size. ?That is a very tangible benefit that Wipro has had with its acquisitions,? says Ruchir Desai, IT analyst with the Mumbai-based research-cum-brokerage firm Pinc Research. ?They?ve not had very many integration issues with the entities they?ve acquired,? he adds. Says Basil of Ernst & Young; ?Wipro has learnt the art of integration given the number of deals in different domains that they have executed so far.?

Wipro?s tendency to go for small buys, incidentally, has been linked to its discomfort with both debt and equity as funding options for its acquisitions. Most of its deals have been funded via internal accruals, and though the available cash is now down to about $150 million from $1 billion in April ?07 on account of the Unza and Infocrossing acquisitions, generating money for new buys is not a big concern. In the last financial year, for instance, Wipro?s operating cash flows were about Rs 2,810 crore ? up from Rs 1,960 crore in the year 2005-06. On a quarterly basis, say analysts, the top three IT services companies in the country, have operating cash flows of over Rs 1,000 crore on an average. So lack of money is not really an issue. ?With the kind of money we generate per quarter, we can continue with our M&A policy without a hitch,? says Nandy.

For now though the company does seem to be strapped for funds, which means that it could either take a break or leverage its balance sheet to get more funds. Says Senapaty, ?I don?t think we are going to stop here. We could either access the capital markets or take on debt. There are multiple financing options available. That?s not an issue.? This statement implies that the company is now willing to shed its inhibitions whatsoever, go for allied financing options if need be, even as its risk appetite grows.

This change of heart comes as Wipro aims for a slot on the Top Ten list of IT services companies in the world among IBM, Accenture, EDS and CapGemini, and all strong both in IT services and consulting.

The latter, in fact, is a strong focus area for the top four. In comparison, revenues from consulting are not very significant for Wipro. Given its focus on technology, analysts say, it is unlikely to move out of the space just yet. ?Technology solutions are a clear area of strength for Wipro. And if you ask me, they are bullish on managed services,? says Basil of E&Y.