Attaining critical mass


In this article we are discussing the might of Indian corporate companies in making acquisitions abroad with some practical examples of TCS and Wipro in particular with figures. That is why the article is appropriately titled as …. “critical mass�.

Wipro’s Chief strategy officer (CSO) was part of the group that had just finalized the acquisition of Portugal-based retailing solutions company Enabler that is expected to provide Wipro expertise to go after global retail giants. Little surprise then that CSO saw Portugal as a home team.

In fact, the world is fast becoming ‘home’ for some of India’s biggest IT companies. Wipro is gobbling up companies. It has acquired as many as 10 companies in four years from the US to Finland. And the process is accelerating. Of the ten companies, six came in just seven months from December 2005 to June 2006, at a cost of about $200 million (Rs.900 crore)

TCS (Tata Consultancy Services) has made some eight acquisition in five years. And it is now seen to be bidding for the UK based BPO Vertex, for deal worth anything between $800 million to $1 billion.

Analysts say the underlying strategy is to acquire domain expertise, global client bases, global employees, a global footprint, and global cultures. In other words the Indian companies want to become global companies and over a time period be in a position to challenge the likes of IBM and Accenture.

Till now, acquisitions have been mostly small. Risks involved with a small company acquisition are seen to be a lot lower.

A series of smaller acquisitions not only helps in smoother integration, but makes the process a lot faster. Size matters in the global IT market. One needs to play spectrum game, say like a bank. Spreading into newer areas will help companies hedge risks. Wipro traditionally, is a diversified company and should be able to manage it.

Wipro’s acquisition strategy currently center around domain expertise rather than geographical presence as the company’s ultimate goal is to be a complete solution provider to clients. For instance they acquired a company which specialized in Oracle implementation because it would have taken a long time for Wipro to acquire the expertise internally. They also acquired a company in infrastructure management because a client was looking for expertise in this space which Wipro didn’t have internally.

But there are other advantages that come with such acquisitions.

A German employee in an acquired company would be able to market and sell solutions in Germany much better than an Indian employee posted onsite. The acquisition of local talent gives the company added advantage of having people who know the terrain better.

In Wipro’s case, acquisitions also brought in important customers such as Shell, Tesco, Ericsson, GM, MasterCard, Philips and Esprit.

In the long term these acquisitions will hold even greater relevance. Experts say that India cannot hope to be a low cost destination forever. So, in many ways, these acquisitions would give Wipro and TCS a wider range of choice.

IDC director (IT outsourcing and utility services) David Tappar says Wipro and TCS are moving in the right direction. However, all tier-I players must stay focused on two or three businesses that they are comfortable with. Global scalability should be the biggest criteria and concern in an inorganic scenario. Companies should be able to diversify and globalize their top management.

That’s often not an easy task. Wipro added close to 1,500 people through the acquisitions it made in seven months, of which over 700 are foreign nationals. The toughest challenge in a buyout scenario like Wipro’s is the integration of IT, management and multiple cultures.

But companies recognize these challenges. For every acquisition it makes, Wipro has a team of 8-10 people (from Wipro and the acquired company) that interacts closely for a year and looks at synergies from the cost point of view. Essentially, this comprises people from finance and HR.

Simultaneously, project management leads and quality leads from both proceed with looking at making the most from the cost advantage that India can offer.

The company chairman says that their experience with acquisitions so far has been quite satisfactory. This has given them the confidence to pursue this strategy more aggressively. Wipro chairman Azim Premji in a letter to share holders in the company’s latest annual report has also mentioned the above point.

Wipro is sitting on cash reserves of close to $1 bn. One can expect a lot more shopping by the company in the times to come.

The Acquisitions Team:

Wipro’s acquisitions are led by a six member core team that is focused on that job. No investment banker is involved and the process of due diligence, valuation and related issues is handled by them. There are inevitably no ‘leaks’ about acquisitions before the deal is finalized because of the high level core team.