The Rise Of M&A in IT sector

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Indian Information Technology (IT) industry has witnessed significant developments and innovations and has resulted in expanding India’s footprint on the world map. As per a NASSCOM estimate, the IT industry may touch $225 billion by 2020 and $350 billion by 2025. Over the years, the IT companies have prioritized on enhancing efficiency, enabling transformation and agility and partnering for digital initiatives. As per the currently available statistics, IT industry is worth $146 billion, including exports of $98 billion, in 2014/15 - clocking year-on-year growth at the rate of 13%. In 2015/16 this industry is expected to grow between 12 and 14 per cent.

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But amongst the successful acquisitions there were some that were not so successful. For instance the acquisition of Infocrossing Inc by Wipro in 2007 as it did not help in consolidating its prevailing leadership in infrastructure management services. Similarly IGate Corp’s acquisition of Patni Computer Systems Limited also has not been successful. However, barring these few transactions which have failed, most of the transactions have been successful in terms of the objective of the acquisition.

Based on the reports publicly available, it can be noted that IT companies have recently increasingly engaged in investment and acquisition activities. Companies in the IT industry and that are reliant on e-commerce, significantly contributed to investments and acquisitions with about $4 billion being raised from over 100 deals in the year 2014. This is further expected to increase particularly in the light of the expected policy changes proposed by the Department of Industrial Policy and Promotion to permit foreign direct investment in the e commerce sector.

The IT sector thrives on innovation and is highly competitive. The sectors survival depends on constant technological development. These IT companies engage in development of new technology by themselves or grow inorganically by acquiring entities with novel ideas, new products, similar business, presence in new markets etc.

Likewise, acquisitions by Indian IT companies have been mostly in order to unlock access to new markets or to adapt to market needs or get hold of newer units/divisions, so that they are one step ahead of their competitors. The table below provides a snapshot of the acquisitions made by top IT Companies and the profile of the acquired companies.

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Image: M&A activities of IT companies in India

To simply encapsulate, various reasons can be attributed to the increase in the acquisition by Indian IT companies. Recent development of mobile technology, cloud computing and data analytics have made tech-giants invest in start-ups or companies dealing with such technologies to enhance their capabilities.

The trend of forming joint ventures and acquisition of companies by tech giants Google, Apple and Facebook has created a market trend to invest in new companies, which are different or similar to the core business of tech companies. This trend has helped these tech giants to incorporate innovative technologies in their existing business portfolio and therefore, one could say companies are following the market leader in order to maintain place in the market.

Also, investing in start-up companies provides impetus to the startup company which in turn helps market placement or induction of the new technologies / products into the market. Since the profitability of these start-ups is not visible immediately, it becomes easy for bigger companies to buy or invest in these startups and to introduce innovative technology to their existing market share.

Another main reason is Intellectual Property (IPRs). IPRs are one of the key assets of these IT companies and acquiring such IPRs are made easier through M&As. Bigger companies would prefer this route as it may be economical rather than paying hefty royalties to these companies.

Further cyber crime has caused IT companies to strengthen their technologies by collaborating or merging or acquiring such technology / companies / startups to divert cost and time to develop technologies through research and development.

The global IT sector is on the rise and the conditions prevailing at the moment has allowed companies to enter into various arrangements with confidence than before. Due to the technological prowess and the revenue generated by it, these IT companies have come to afford M&As, takeovers and risky investments which is a reason why there has been a rise in number of M&As.

Here is hoping that the recent initiatives of the union government for instance Make in India, Digital India, Skilling India etc. provide the right impetus to make the IT sector in India even bigger.

(The article has also been co-authored by Yogesh Nayak and Zil Shah, both senior associates, Rajani Associates.)