Mergers and Acquisitions Scenario in It/Ites in India

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|MERGERS AND ACQUISITIONS SCENARIO IN IT/ITES | | | |ERNST & YOUNG | | | |5/27/2009 | | | |SHIVA KUMAR A |

Contents

GEOGRAPHICAL M&A TRANSACTIONS5

India5
USA6
Europe7
Japan7
Other World8

COMPANY SPECIFIC TRANSACTIONS8

IT Companies8
ITES8

COMPANY SPECIFIC ACQUISITIONS9

SIZE10

CAPTIVES11

Obama’s Outsourcing Policy And Its Impact On Future Of Captives11

PE’S AND VENTURE CAPITALISTS12

VALUATIONS13

FUTURE TRENDS14

Mergers and Acquisitions scenario in IT/ITES

The success story of Indian IT/BPO is attracting a lot of growth opportunities. To achieve it potential the industry is taking an inorganic route to meet its demands. The industry has been much concentrating on the fast growing US market. With the subprime crisis, and the world on the brink of recession, it remains to be seen if the industry will still sustain its rapid growth. Every bad scenario has a built in opportunity in it. Likewise here the recession may prove to be a boon for the BPO’s. The focus on cost reduction is expected to increase, keeping in mind the current recessionary environment. Hence, the mileage will shift towards outsourcing. The future outlook is positive, leading to increased momentum for global sourcing.

There is a similarity between outsourcing and M&A activity. Both have significant opportunities in recession. When the economy slows down the concept of “survival of the fittest” comes into play. The weak are forced to exit, and in the process the strong emerge stronger after a round of consolidation in the industry. Along with recession comes the issue of rupee appreciation. Though it might be impacting the profits of the industry, in another way it provides significant opportunity, opportunity to go overseas and acquire foreign companies. Since the rupee now will have power to buy more dollars, acquisitions might become cheaper and create more value. An analysis of around 24,000 transactions between 1996 and 2006 shows that acquisitions completed during and right after the last recession (2001-02) generated almost triple the excess returns of acquisitions made during the preceding boom years. Therefore the question is not whether there will be increase in M&A activity.

Another concern currently going rounds is the Obama’s newly announced tax policy which aims at deincentivizing American companies that outsource and pass on the benefit to those companies actually creating jobs in the U.S.. Since it is an U.S Law it is going to affect only the U.S. companies that are outsourcing through establishing captives. The parents may be forced to sell their subsidiaries, if the costs outweigh the benefits of outsourcing. This reiterates our view that M&A activity is on the rise.

Let’s have a recap of the M&A activity in the industry’s recent past so as to establish a baseline and project future activities.

| |No of Deals |Value of Deals | |2007 | 175 | $2.9 Billion | |2008 | 103 | $ 3.4 Billion |

If we look at the table, the value of M&A transactions has risen by 18%, from $2.9bn in 2007 to $3.4bn in...
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