Artificial intelligence (AI) is raising the scale and capability threshold for mid-cap information technology (IT) services companies, potentially triggering a fresh wave of consolidation as firms look at acquiring capabilities, expanding their portfolios and competing for larger transformation deals.
The recent merger of Happiest Minds Technologies with ITC Infotech is an early sign of this shift. Mid-sized IT firms that once competed on agility and niche capabilities are increasingly finding that they need broader offerings, deeper engineering capabilities and greater execution scale to remain relevant as clients consolidate their technology vendors and large IT services companies push deeper into the mid-market.
For companies with cash in their balance sheets, acquisitions offer a faster route to these capabilities than building them organically. At the same time, mid-cap firms that struggle to invest in AI and scale up could themselves become acquisition targets, while private equity firms with capital to deploy could back companies looking to make such investments.
“Mid-cap IT companies with cash-in-hand will prefer to speed things up by acquiring firms with niche capabilities to amp up their offerings. Meanwhile, global PE firms that are flush with capital may also pick up stakes in mid-caps looking to build AI capabilities,” an IT analyst said. The shift is already visible in Persistent Systems’ proposed €1.27-billion acquisition of German digital engineering company Nagarro. The deal would expand Persistent’s European footprint, diversify its revenue beyond North America and create a nearly $2.9-billion AI-led digital engineering firm.
Persistent has also approved a fundraise of up to $1.25 billion, underscoring the scale of capital that could be required as mid-cap IT firms seek to buy capabilities and grow in an AI-driven market. Happiest Minds’ rationale for its merger with ITC Infotech follows the same logic.
Joseph Anantharaju, co-chairman and CEO of Happiest Minds, said vendor consolidation and large transformation programmes increasingly require broader capabilities and execution scale.
The merger will take the combined company to about 19,000 employees, bringing it closer in scale to companies such as Coforge and Persistent Systems while giving Happiest Minds access to Europe — ITC Infotech’s largest geographical market.
The pressure is particularly acute because large IT services providers are increasingly using their balance sheets to pursue the mid-market, which was traditionally an important hunting ground for mid-cap firms. While smaller companies may have strong relationships with individual clients, expanding those relationships across a wider wallet is becoming harder.
“Mid-caps have to bring specialised capabilities that are hard to replicate and not generic in nature,” another IT expert said, pointing to the Happiest Minds-ITC Infotech and Coforge-Encora transactions. Smaller acquisitions of AI boutiques could also become more common as companies seek specialised engineering or vertical expertise.
The underlying economics of the industry are changing as well. “AI is changing the economics of the IT services industry,” Manish Tandon, CEO and managing director of Zensar Technologies, said.
The traditional model of scaling through headcount and service-line expansion is giving way to AI-led productivity, differentiated domain capabilities and measurable business outcomes, he said.
For mid-cap IT firms, therefore, the choice is increasingly between building, buying or being bought. Happiest Minds, which had initially targeted $1 billion in revenue by FY31, has brought forward the goal to FY28 following the ITC Infotech deal, with Managing Director Venkatraman Narayanan acknowledging that the company would have struggled to achieve it without the merger.