Indian IT outsourcing companies have been on an acquisition spree that will only increase in 2016

Eyeing buyouts
Eyeing buyouts
Image: Reuters/Stringer
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Legacy IT outsourcing companies in India continued acquiring aggressively in 2015. Most of the acquisitions were made in areas such as design and automation to help the companies cut costs, and stay ahead of the innovation curve.

In 2015, Bengaluru-based Infosys, which has so far been conservative about inorganic growth, went all out on acquisitions. The second largest firm in the over $100-billion Indian IT services sector acquired three companies. This is a big shift in Infosys’ business strategy, given the company acquired only three companies in the seven years prior to 2015—McCamish in 2009, Portland in 2011 and Lodestone in 2012.

“IT services companies have realised that it is not possible to adapt to new demands from clients organically, so they are basically sourcing innovation through these acquisitions,” Sanchit Vir Gogia, chief analyst and CEO of advisory firm Greyhound Research, told Quartz.

Here are some of the biggest acquisitions by Indian IT services companies in 2015:

Tata Consultancy Services, the country’s largest IT services company, did not make any acquisition in 2015. Also, the US-headquartered Cognizant, which closely competes with Indian IT services companies, stayed away from acquisitions this year. Cognizant had bought four companies in 2014 and three in 2013.

Right direction

After the global economic slowdown in 2008, IT outsourcing companies were forced to transform their businesses, as clients demanded cost-cutting through automation and cloud. As a result, most acquisitions this year occurred in the following three areas:

  1. Automation: With rising wages in India, the cost advantage of outsourcing to the country has been reducing. Automation helps in getting work done at lower prices.
  2. Design: As traditional outsourcing jobs dry up, IT companies want to rise up the value chain and take up work around clients’ new focus areas like mobile and apps.
  3. Consultancy: To get businesses in new geographies and domains.

In addition, some buyouts this year were made to acquire intellectual properties (IP), which could help IT services companies establish themselves in the software business.

While acquisitions are small in size, and might not add to the revenue or profit of these multi-billion-dollar IT companies, they do help send out the right signals.

“When their clients hear about an acquisition in a particular space, they understand that the company is serious about the area, and will start discussions on how they can work together not just on the traditional business side but even on new technologies,” Shashi Bhusan, senior vice president at investment banking services firm IDFC Securities, told Quartz.

And there’s more coming. At least five sectoral analysts that Quartz spoke to for this report believe that this is just the beginning of an “acquisition wave” by Indian outsourcing services companies.

“The year 2016 will be much bigger in terms of inorganic growth for IT services companies,” Gogia of Greyhound Research explained, “because there’s a lot more capabilities that they need to have before becoming a serious player in new tech areas.”