Will Mergers & Acquisitions Reboot the Indian IT Sector?

The IT and broader technology sector has been in the limelight during the pandemic / lockdowns. This was due to the growing importance of working online.

Now a new wave appears to be powering the growth for the IT sector. A spate of mergers & acquisitions (M&A) has been announced or are nearing completion.

This trend of M&A is taking place in sectors as diverse as cyber defense, social media, and enterprise software. It's led by global as well as Indian IT firms.

Also, the sky high valuations of recent M&A deals by American technology companies has also raised eyebrows among global investors.

Recent Acquisitions

The most notable acquisition over the last few days has been Elon Musk's takeover of Twitter.

The world's richest person and founder of Tesla announced a nearly US$44 bn buy-out of Twitter.

Media reports indicate Musk plans to take Twitter private and grow the user base of nearly 300 m aggressively over the next few years.

Twitter ended 2021 with revenues of about US$5.1 bn and a net loss of US$221 m.

In early March, Google announced the acquisition of US-based Mandiant for US$5.4 bn. It's a cyber-defense related firm with revenues of US$483 m in 2021 and a net income of US$0.9 m.

It's no surprise the market is comparing these eye popping valuations with the ones during the dot com era of mid-1998 to early 2000.

What about India IT companies?

Meanwhile, Indian IT players are also buying companies overseas. This is a bid to widen their offerings, but at far more conservative valuations.

Wipro on Monday announced the acquisition of US-based Rizing Intermediate Holding. It's an SAP consulting company. The valuation was US$540 m or nearly Rs 40 bn.

After announcing the deal, Wipro in a statement said,

• Rizing's industry expertise and SAP consulting capabilities in enterprise asset management, consumer industries, and human experience management, will be "instrumental" in advancing Wipro's position as an advisor for clients' most complex SAP transformations.

Wipro has done this acquisition at about 2.8 times 2021 revenues. No details have been provided about the profitability of Rizing Intermediate Holding.

Earlier, Tech Mahindra acquisition of European IT-company Com Tec Co IT for Euro 310 million (nearly Rs 26.4 bn) was at nearly four times annualizing calendar year 2021 sales of the overseas player.

Wipro has done several overseas acquisitions over the last few years. In April 2021, it had announced the acquisition of Australia-based Ampion for nearly Rs 8.5 bn. It also bought a UK-based IT consultancy Capco, in March 2021 for nearly Rs 90 bn.

Shareholders and analysts will be keen to hear what the company's management has to say about the acquisition spree.

The company is scheduled to announce results for the fourth quarter and for fiscal 2022 tomorrow.

Another merger in the works?

Another possible merger that is being watched closely by Dalal Street, is the one of L&T's two group software companies - L&T Infotech and Mindtree.

No clarity is available in terms of when the board of directors of the two companies are meeting. But the street is closely watching developments.

Reports suggest the company's boards are expected to meet in the first week of May to finalise the terms of this merger, if it happens.

If the merger does take place, the combined entity will edge past Tech Mahindra and become the fifth-largest IT services firm by marketcap in India.

L&T Infotech leads in banking, financial services, and insurance, with over 45% revenue share. Mindtree gets the bulk of its revenue from retail (22%) and communications media technology (43%).

'Big is better' appears to be the motto of IT companies as they prepare for the next wave of growth.

In a merger, the acquiring company must pay a reasonable price for the target company.

It needs to gauge the likely synergies post acquisition such that the payback period is not too long.

Often when competition for a particular target heats up, valuations soar. As a result, the company which finally makes the acquisition ends up paying a very high price.

We will keep you updated on the latest developments from this space. Stay tuned.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.