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5 reasons why mid-sized IT firms will consolidate

india Updated: Jul 23, 2012 14:56 IST
N Madhavan
N Madhavan
Hindustan Times
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Last week, iGATE Corp finally stitched up its acquisition of Patni Computer Systems in a $1.2 billion (R5,500 crore) deal. But look at the sizes of the two companies. iGATE with 8,000-odd employees is effectively swallowing Patni that has more than 16,000. The scope reflects in revenue terms as well.

If there was one distinguishing factor, it is the management power of iGATE symbolised by CEO Phaneesh Murthy, who was earlier global sales head for Infosys.

Last year, we saw the consolidation of the fraud-mauled Satyam Computer Services into the Mahindra group’s fold. While Tech Mahindra sent its managers to clean up what is now Mahindra Satyam, it is only a question of time before Satyam is formally folded in. Again, this is a case of a smartly managed smaller firm getting the assets of a larger one. Both these buyouts symbolise to me an undercurrent of consolidation in India’s software and IT services industry, which I expect to pick up in the coming months. Here are five reasons why I think this will happen.

1. Big size can win big deals: As iGATE noted, larger customers such as General Electric have higher chances of giving long-term contracts to larger firms.

2. Employer branding is critical: After the 2008 meltdown, the industry once marked by high attrition is relatively stable. Retaining employees is easier if you are big enough to offer a combination of growth and security

3. Margins matter more: A decade ago, anyone who could write code could be called a “software service provider.” Companies now need to be big enough to save costs on shared infrastructure and sales teams to be able to maintain profit margins.

4. Everybody is in India: Indian IT firms have lost the “Indian” advantage because even global giants such as IBM and Accenture employ huge armies in India. Consolidation is critical for efficiency.

5. Private equity, IPOs drive deals: Key shareholders want mid-sized companies to be run by efficient managements. With private equity increasing its hold, mergers and acquisitions are more likely.