India has produced quite a few success stories in the IT space with the likes of Infosys, Wipro, TCS, HCL, Tech Mahindra, Satyam, Patni, etc. Each of these companies, without any exception, have grown mostly through the organic route. It is not that they did not do any acquisitions. They did. But none of them were worth more than the revenue from their largest customer. Can the Indian IT companies reach the next frontier without big-ticket M&As and consolidation? When I tried to dig deeper into the reasons behind this, what I found was interesting.
Firstly, most of the Indian IT companies are either family businesses (HCL, Wipro, Patni) or cash cows of big business houses (TCS). Though Infosys is an exception, it was never considered a serious risk-taker when it came to growth. When companies have such background, we can only expect them to be very conservative when it came to M&As. Mahindra group buying Satyam cannot be considered a classical case of M&A because it was a classic case of government intervention & fire-sale at the same time.
Secondly, when you go for big-ticket acquisitions, there is always the question of control of the merged entity. Most of the Indian IT companies will not be able to handle that situation well. They are used to having most of the decision makers in India while some local folks are taken in at on-shore locations to handle the clients. Let us take the case of Infosys & Cap Gemini merger which was talked about some time ago. If that had materialized, I am not sure if the Infosys would have managed that well. It would have been an utter failure given the management structure at Infosys. I have not heard of any other Indian IT biggie even thinking of a big-ticket acquisition.
Going forward, I don't think Indian IT companies can afford to shy away from taking the M&A route to reach the next level. That is because, most of IT companies are engaged in IT services and don't have any clear USP which differentiates one from the other. None of the Indian IT companies have invested heavily into developing functional expertise which is key to win large deals. To make things worse, foreign IT companies like HP, DELL, IBM, Oracle, etc. have very strong India presence as well as other cheaper offshore locations. So, when big-ticket IT deals are up for grabs, Indian IT biggies are up against formidable competitors who can offer more complete solutions (Hardware, Software, Consultancy) than these guys can.
Now the question is what kind of acquisitions that the Indian IT biggies should go after so that they are not only successful in managing the integration and grow to the next level, without too much of disruption? The answer is not simple. They should go after companies which can get them formidable leads in specific verticals as well as key markets. For example, when DELL acquired Perot, one thing which mattered most, in my view, is Perot's leadership in Government,Healthcare and Infrastructure verticals in addition to having a strong offshore presence. Indian IT biggies have a strong offshore presence and hence they need to go for acquisitions which will get them strong advantage in specific verticals and leadership position in key markets.
Indian IT companies need to go after finding companies like Perot which can quickly get them to leadership positions in specific verticals. But, for such mergers to succeed, the top management of these companies should change their mindset from being offshore leaders to business enablers. I still don't see that shift happening yet. With Indian economy on a roll, Indian IT companies are enjoying phenomenal valuations. At the same time, foreign companies, because of the muted growth in their base locations, have very low valuations. This is the time to go after good acquisition targets and make it happen. Indian IT companies which capitalize on this opportunity will manage to scale to the next level. The rest will become acquisition targets of the successful ones, later.
In summary, it is high time Ratan Tata takes similar risks that he took while acquiring Corus, with TCS as well. It is high time Indian IT companies start looking seriously at the M&A route on a much bigger scale and different focus, in order to survive and thrive to reach the next frontier.
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