Source: www.hindustantimes.com

India’s Information Technology sector is expected to lead the next big wave of cross boarder mergers and acquisitions (M&A) with Europe and India finding new synergies due to a depreciating dollar and the software services companies’ urge to scale up operations. According to analysts and investment bankers, the change in dollar-rupee equation will force Indian IT firms to look more at Europe and non-US centric geographies for expansion. Europe-targeted cross border mergers and acquisitions are expected to be increased over the next few years.

Investment bankers predict there can be deals ranging from $100 million to $1.5 billion in the IT sector over the next few years. “There are enough skill sets in India and the industry has matured enough. There will be a mix of private equity or a strategic player pitching in for buyouts in the short to medium term future. We expect there will be deals ranging from $100 million to $1.5 billion in the IT sector soon, which were not there earlier,” said Frank Haffmans, executive director for ABN Amro’s technology banking division in Europe.

Currently Europe contributes less than 25 per cent of the total revenues of Indian IT firms. TCS, India’s largest IT firm earns 28 per cent of its revenues from Europe while Infosys earns 27 per cent.

According to S Ramadorai, MD and CEO of TCS, Europe is the next biggest opportunity for Indian IT firms. “We see a lot of outsourcing deals coming from infrastructure management related services from Europe. We have been actively concentrating on Europe for quite a long time and the Pearl deal is a testimony to that. And we expect better growth prospectus in Europe,” he said.

However, those firms could not make such inroads into the markets through organic route will go for buyouts.

Says Sangameswaran Manikkan, Executive Director and Head of ABN AMRO (India), “As the US dollar is depreciating against Indian rupee, top line of the Indian IT firms in rupee terms are getting affected. This has forced them to consider hard the need to diversify to other euro denominated geographies and thereby balance the revenue mix to maintain the growth momentum. So the easy way out should be to get into European market. However, these markets are very relationship-driven and hence the need for acquisitions for a quick ramp up. Moreover, Indian IT firms today have the right kind of asset base, skills, capabilities and scale to go to a non-US market through big ticket acquisitions.”

The reasons are not just that of dollar weakening but IT companies want to have more geographical presence and also to explore more markets.

“The Europe centric M&A activities will increase as a local presence will give a lead to make inroads to the European market. And companies that could not make a concrete organic growth in those geographies will definitely opt for buy outs in the regions where they want to have a major presence,” said Amar Chintopant, CFO, 3i Infotech, which had done 25 acquisitions till date.

According to a senior UBS official, private equity firms will play a major role in India-centric buyouts.

Source: www.informationweek.com

Smaller, shorter, and more flexible deals are the rule.

Many seven- to 10-year contracts signed as the offshore industry started to boom are winding down. Often in their place are shorter pacts, with fewer megadeals as buyers split their work among multiple service providers.

“The days of 10-year contracts are few and far between,” says Paul Spence, CEO of global outsourcing at Capgemini, where the average deal length today is 6.4 years. Capgemini still sometimes lands a whopper, like its $9 billion, 10-year deal with the United Kingdom’s Revenue & Customs department, in which much of the work is done offshore. But that deal happened only because both sides can renegotiate some aspects of the contract over the years, to react to technology changes, for example.

As long-term deals end, Dan McMahon, a senior associate with outsourcing advisory firm Pace Harmon, sees companies switching suppliers, rebalancing what’s onshore and offshore, and in some instances bringing select work back in-house. He also sees higher-level executives taking charge of offshore contracts.

As offshore salaries rise, the easy pickings contracts that save 70% on simple coding are gone, says Atul Vashistha, chairman of outsourcing consulting firm NeoIT. But companies can still save 30% on many types of IT projects, he says, and “we have a long time to go” before that gets squeezed.

There were 228 outsourcing contracts worldwide valued at more than $50 million in the first three quarters of this year, a 16% drop from like-sized deals last year, consulting firm Technology Partners International finds. That hurts global giants–Accenture, Capgemini, IBM–and can help the Indian firms, which then get a slice of big deals. The value of contracts split between Indian and U.S. customers has risen 37% this year, says TPI.

Indian operations are suffering under the rising rupee, making contract pricing a “difficult discussion,” McMahon says. It’s why Indian firms are often the ones pushing to tie projects to a business outcome measurement such as revenue increases or cost cuts, so the buyer focuses less on the price of hourly labor.

Capgemini often has negotiated contracts that include around a 5% annual price hike for salaries. That doesn’t help in India or Poland, where annual salaries are rising about 15% and 9%, respectively, says Spence. So Capgemini has started negotiating contracts that shift work over time along a pyramid, where the most-educated and highest-paid people fill the top 15%. They work on the contract early on to build and implement, then shift work to lower-salary workers to maintain it. It’s just one of the ways contracts are keeping up with the changing offshore market.