There have been a greater number of smaller deals (<$25 mn) than in the past. We estimate inorganic contribution to FY21e revenue to be 2%/ 1.7%/0.7% for TechM/HCL Tech/Infosys.
The top 5 Indian IT companies have announced acquisitions worth $500 mn+ across 9 deals in FY20YTD with Tech Mahindra & Infosys the most active. Over the last three years, acquisition of digital (55% of deals) & ERS (16%) capabilities has been the key driver of inorganic strategies of IT cos. There have been a greater number of smaller deals (<$25 mn) than in the past. We estimate inorganic contribution to FY21e revenue to be 2%/ 1.7%/0.7% for TechM/HCL Tech/Infosys.
$500 mn+ of acquisitions announced in FY20e; Infosys & TechM lead: The top 5 Indian IT cos. have announced acquisitions worth over $500 mn in FY20e. This is lower than the $1-bn average spend on acquisitions over the last 7 years though the number of acquisitions is in line with the period average at 9. Infosys & Tech Mahindra have led in FY20e with the former acquiring Simplus for $250 mn and Eishtec as well; Tech Mahindra has announced 5 acquisitions through the year adding up to a total value of $200 mn.
Soft inorganic year for HCL Tech, Wipro, TCS: HCL Tech, which had an extremely active year in FY19 with $2.2 bn of deals announced including the IBM products acquisition for nearly $1.8 bn, had an understandably quiet year in FY20 with only one acquisition (Sankalp Semiconductor). TCS did not announce any acquisition this year – again not surprising given that it has been the least acquisitive of the top IT cos. historically. Wipro also announced a single acquisition (ITI at $45 mn) this year.
Digital, ERS capabilities key driver of acquisitions over FY18-20YTD: Digital & ERS emerge as the key drivers behind acquisitions with 55% and 16% of the acquired companies focusing on these capabilities. Traditional ADM, BPO and infra services account for 23% of acquisitions while the remaining were mainly related to specific vertical expertise.
More of smaller sized deals over FY18-20YTD: We also find that in recent years, proportion of smaller sized deals (<$25 mn and $25-100 mn) has gone up compared to the previous five years (FY12-17). Over FY18-20 YTD, acquisitions valued below $25 mn accounted for 36% of total vs. 28% over FY12-17 while those valued above $100 mn dipped to 17% from 30% earlier. This reflects the trend of acquisition of smaller/boutique firms (incl. design studios) with digital capabilities in our view.
US remains the top geo for acquisitions: US remains the top geography for acquisition, accounting for 45-50% of deals over both FY18-20YTD and FY12-17. The remaining deals have been roughly equally divided between companies based out of UK & Europe and Asia-Pacific.
Inorganic contribution to revenue in FY21e: We estimate inorganic contribution to revenue in FY21e to be 200bps for Tech Mahindra, 170bps for HCL Tech (mainly on account of spillover of IBM products to Q1FY21e) and 70bps for Infosys. For TCS & Wipro we do not expect much inorganic contribution. These will be baked into the explicit FY21e growth guidance of Infosys & HCL Tech when they announce full year results in April.