Are acquisition strategies of IT bellwethers right? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  
  • Home
  • Outlook Arena
  • Sep 21, 2011 - Are acquisition strategies of IT bellwethers right?

Are acquisition strategies of IT bellwethers right?

Sep 21, 2011

India Inc is no stranger to big ticket takeovers. Tata Steel acquired Corus in a deal worth US $ 7.6 bn. Aditya Birla Group's Hindalco acquired the Canada based firm Novalis in an all-cash transaction for US$ 6 bn. And not to forget Tata Motors which acquired Britain's most famous automobile manufacturers, Jaguar and Land Rover, in a US $2.3 billion deal. There are several others big acquisition deals by other business houses in India as well. Now pause for a moment and think about our Indian software majors. Have you ever heard of similar big acquisitions by our IT bellwethers Tata Consultancy Services and Infosys? Your answer would be "No". Why it is so?

Let us first spend a minute on what an acquisition is. An acquisition is the purchase of one business or company by another company or other business entity. There are various purposes of an acquisition such as to achieve greater economy of scale, to increase market share, to have taxation advantage, to create synergies between operations of two entities or to form a vertical integration. Sometime it is also done for diversification or just to expand the business house's footprint.

Now getting back to the question raised earlier, there could be various reasons. It may be the lack of right opportunities in the software sector. Companies like Tata Motors, Tata Steel, Hindalco could visualize the synergy because of the nature of the businesses they were in. However, in IT sector, getting that kind of synergy is relatively difficult as they generally tend to cater to different verticals which are again addressed differently by different companies. Therefore finding that one perfect fit is a challenge for the companies.

Having said that, it is not that the IT companies have not made any acquisition at all. Companies have acquired others but none has been as big as the ones seen in the other sectors. Let us see how the acquisitions or the lack of it have impacted the companies' revenues and profitability.

Revenue Growth Rate of Indian IT companies
Company FY2006 FY2007 FY2008 FY2009 FY2010 FY2011
Infosys 33.5% 45.9% 20.1% 30.0% 4.8% 20.9%
TCS 36.1% 40.9% 21.1% 23.0% 8.0% 24.3%
Wipro 29.9% 41.5% 33.2% 28.6% 5.9% 14.1%
HCL Technologies 36.4% 32.7% 24.6% 35.3% 18.6% 26.2%
Mindtree 82.1% 31.5% 25.3% 67.3% 4.7% 16.4%
3i Infotech 44.5% 56.8% 83.9% 89.6% 7.1% 5.0%
Tech Mahindra 31.4% 135.7% 28.6% 18.5% 3.6% 11.1%
Source: Equitymaster Research, Company's Annual Reports

Net Profit Growth Rate of Indian IT companies
Company FY2006 FY2007 FY2008 FY2009 FY2010 FY2011
Infosys 30.0% 56.9% 20.8% 28.5% 4.6% 9.1%
TCS 50.1% 42.7% 18.8% 4.6% 33.2% 29.5%
Wipro 27.0% 42.3% 11.6% 18.8% 18.7% 14.3%
HCL Technologies 11.6% 90.9% -15.8% 18.8% -4.6% 29.9%
Mindtree 221.1% 66.1% 14.7% -49.4% 310.8% -52.7%
3i Infotech 79.6% 94.3% 80.0% 43.0% 4.1% -3.2%
Tech Mahindra 129.9% -62.8% 276.6% 207.5% -31.0% -8.0%
Source: Equitymaster Research, Company's Annual Reports

As seen above, the top three companies Infosys, TCS and Wipro witnessed consistent growth in their revenues as well as net profits. And they have done this with very small or no acquisitions at all. However, other firms though registered consistent growth at the topline level; they failed to see similar movements at the net level. The one important reason for this is while top three firms grew mostly organically, while other firms did several acquisitions for getting those growth numbers. This may suggest that acquisitions do not fetch good results at least for the IT companies. If we delve deeper we see this has actually been the case for some of the companies.

In 2009, Tech Mahindra acquired the operations of erstwhile Satyam. The company had stated that it would look to merge the operations with itself at some point of time. However, there is still no clarity with regards to the merger details or timeline due to various regulatory roadblocks. As a result, performance of Tech Mahindra suffered as well.

Another example, 3i Infotech had done various acquisitions in Banking, Financial Services and Insurance (BFSI) space such as J&B Software in November 2007, Regulus Group in May 2008 and JP Morgan Chase's retail check processing division in June 2009. The company had to incur restructuring costs towards the integration of these units to form a Global Billing & Payments unit. Interestingly these payments ended up as a bad investment for the company. It increased interest burden of the company and adversely impacted company's cash-flows and. What is more, the company had to sell these units due to lower-than-expected performance and bleak future prospects of the same.

On the other hand, companies like TCS and Infosys have not gone all out to acquire operations of others. As a matter of fact, in light of the above, we can definitely congratulate the high quality management of the top firms for managing the company's cash well and not squandering away the money in meaningless acquisitions. While many experts have criticized Infosys for not being aggressive because of not pursuing acquisitions very actively. However, the management of the company believes that they are not in the business of buying revenues. Hence, they always refrained from high priced or misfit acquisitions. For those experts who find Infosys not very aggressive, we can say only this much that they need to look all the big campuses the company is setting up across the country as well as outside the country, that too ahead of time. Being aggressive does not mean only acquisitions.

All this does not mean that these companies do not have any acquisition strategy or they are averse of acquisitions. However, they have set stringent criteria which they feel can help create synergy and better value for the shareholders. For example, Wipro has recently acquired the IT related Oil & Gas business of Science Applications International Corp (SAIC). This acquisition is very strategic to the company. It would enhance Wipro's domain capabilities in the upstream area and make it an end-to-end service provider in the Oil & Gas space. Looking at the emerging opportunities in the healthcare space, Infosys is eyeing to buy Thomson Reuters Corp. (TRI)'s health-care business and is the frontrunner for the same. These companies are just waiting for the right opportunities at the right valuation. Which we believe is the right strategy.

To conclude, just because you have the cash balance does not mean that you acquire anything and everything. Particularly in case of a company where the wealth of many is at stake. After all it is shareholder's wealth put under the faith of the management. Therefore the management is obliged to ensure the best use of the resources entrusted to them. In that regards, we appreciate IT major for not destroying the shareholder's wealth in making meaningless acquisitions. Investors too must keep this in their minds the next time they read an acquisition related story. Delving deeper may throw out the fact that the acquisition is really not worth the effort or the money that it demands.

Equitymaster requests your view! Post a comment on "Are acquisition strategies of IT bellwethers right?". Click here!

3 Responses to "Are acquisition strategies of IT bellwethers right?"

Joe Aberger

Sep 28, 2011

Mergers and acquisitions require strong and decisive leadership. This session,presented by seasoned PRITCHETT consultants, positions leaders to:

Manage the operational, organizational, and cultural dynamics of mergers
Avoid the pitfalls typically encountered in mergers
Minimize the negative impact on customers, business performance, and employee engagement during the integration




Sep 22, 2011

HCL Tech did an excellent acquisition of Axon for which infosys was a frontrunner as well. They are reaping the benefits of the acquisition now. Wonder why this was not mentioned in the article.

Like (1)

Harit Shah

Sep 22, 2011

Just a correction here - you say that, "As seen above, the top three companies Infosys, TCS and Wipro witnessed consistent growth in their revenues as well as net profits. And they have done this with very small or no acquisitions at all." However, Wipro has acquired some 12-15 companies over this period, including mPower, Saraware Oy, Unza, Northwest Switchgear, cMango, Hydrauto, Infocrossing, Enabler, Quantech and Newlogic, all between FY2006-11!! So I suggest you get your facts straight before writing on a public forum, which is read by so many users.

Like (1)
Equitymaster requests your view! Post a comment on "Are acquisition strategies of IT bellwethers right?". Click here!

More Views on News

Your Queries on the 8-Year Cycle Answered (Fast Profits Daily)

Sep 25, 2020

You've sent in your queries on my videos on the 8-year greed and fear cycle in the market. I'll answer them in this video.

It's When You Sell that Counts (Profit Hunter)

Sep 25, 2020

How I alerted readers to the impending crash last week.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

How to Save Money by Exiting Stocks Before They Fall podcast (Views On News)

Sep 24, 2020

A penny saved is a penny earned. It doesn't matter where you enter. All that matter is where you exit. Watch this video to identify an opportune time to exit your investments and book profits.

ICICI Prudential ESG Fund: Aims for Sustainability (Outside View)

Sep 24, 2020

PersonalFN briefly explains the newly launched fund : ICICI Prudential ESG Fund.

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 25, 2020 (Close)