WIPRO, INFY, TCS EYE IT CAPTIVES IN GERMANY

Pankaj Mishra, Bangalore, November 17, 2008
The Economic Times

Leading Indian tech firms including Wipro, Infosys and TCS, apart from several others, plan to acquire captive information technology units of large outsourcers such as Volvo and Bosch in Germany, as they seek to increase their revenues from Europe and also get the most out of these customers’ total IT outsourcing budgets.

According to a senior official at one of the top Indian IT firms, these captive deals could be for anywhere between $400-500 million or even more depending upon the amount of IT work they do for their parent organisations. “These captives can bring an annual revenue run rate of at least $300 million,” confirmed a senior company official. “We are evaluating them,” he added.

At a time when these tech firms are seeing a slump in the demand for software services in their key US market, which accounts for over 60% of their revenues, such captive deals in Europe will help them diversify. The IT services markets in Europe include UK ($50-60 billion), Germany ($40-45 billion) and France ($35-40 billion).

“Not only would such acquisitions help us establish better presence in Europe, but these transactions will also bring a captive customer with assured annual revenues,” added the official. Many German companies including Volvo, Bosch, Lufthansa and BMW carved out their IT departments into fully owned subsidiaries in order to focus better on their core operations.

For instance, Volvo IT, which employs around 5,000 professionals apart from almost 2,000 external IT contractors across Europe, US, Australia, Africa and Asia, was spun-off as a company way back in 1967. Lufthansa Systems AG, the IT subsidiary of Lufthansa Airlines has around 3,000 employees with revenues of almost $860 million, and 200 customers in segments of banking and finance, apart from the aviation industry.

This is not the first time Indian companies have shown interest in acquiring captive operations of a German customer. In August this year, some of the Indian tech firms were bidding for BMW’s IT subsidiary, Cirquent GmbH, which was eventually acquired by Japanese IT firm NTT Data Corporation.

“There were around three rounds of bidding, but Indian vendors could not make it to the final round because of job loss fears,” a person familiar with the transaction told ET. “In fact one of the Indian vendors had bid almost $300 million for BMW’s IT wing, but NTT did better.”

Captive organisations of large customers have always been an attractive target. In October this year, TCS acquired the Indian BPO arm of Citibank for around $505 million, which came with an assured business from Citibank worth around $2.5 billion over a period of 9 years. Citigroup Global services is expected to generate revenues of around $278 million this year alone.

When contacted, officials at Wipro and Infosys could not offer any specific details on their European M&A targets. However, a Wipro official added that his company is evaluating M&A options in order to address the lucrative IT services markets of Europe. “We are not looking at turnaround cases. Our focus is on revenue synergies, not cost,” said KR Lakshminarayana, chief strategy officer, and M&A head of Wipro Technologies.

However, as another expert mentioned, Indian companies will have to structure these deals keeping the local sentiments in mind. “Indian companies need to evolve beyond pure-play offshore vendors, and look at strategic benefits of having a pool of local IT resources in order to gain trust of these large outsourcers,” he said.