Deals Hint At Consolidation Of IT Services Industry - InformationWeek

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IT Leadership // IT Strategy

Deals Hint At Consolidation Of IT Services Industry

EDS wants to buy Indian outsourcer, while CSC puts itself up for sale. Are more deals on the way?

There's deal making afoot in the highly fragmentedIT and business services market. The catch for vendors looking for a suitor: If you're big in India, you're hot; if not, you might be on the sidelines for awhile.

Last week, EDS offered $380 million to acquire a 52% stake in Mphasis, a Bangalore provider of software and business process outsourcing services with $171.3 million in revenue in its most recent fiscal year. The offer represents a 30% premium above Mphasis' average share price over the past six months. Mphasis' directors are encouraging the company's shareholders to accept the deal, but some are holding out for a higher price.

They might get it. Acquiring an Indian services firm is a fast and relatively straightforward way for U.S. vendors to quickly add workers and real estate in a country where programmers are paid as much as 80% less than what they would earn in the United States. As a result, firms that already maintain a large stable of Indian IT talent--Mphasis employs 11,000 workers in the country--may command a premium. "They're overpriced, but people are willing to pay just to get fast growth in India," says Paul Hsi, an analyst at BlueMountain Capital Management, a hedge fund.

Deal Time
  Accenture acquired Savista, a Wichita, Kan., business process outsourcer
  EDS offered $380 million to acquire a 52% stake in Indian IT services firm and outsourcer Mphasis
  CSC said it was exploring strategic alternatives, including finding a buyer for itself
Compare Mphasis with Computer Sciences Corp., which last week publicly placed itself on the block but which privately, and unsuccessfully, has been seeking a buyer for the past several months. CSC's government outsourcing division is attracting strong interest because of heavy spending on IT services by the Department of Homeland Security and other federal agencies. However, its commercial division holds little appeal for most buyers, though Hewlett-Packard is said to have kicked the tires before taking a pass. CSC's problem: "Buyers are all looking at India," Hsi says.

CSC, with $14.6 billion in annual revenue, did try to spruce itself up in that regard last week when it unveiled its fourth Indian development center. It also promised to cut 500 expensive positions outside the country--mostly in Europe--over the next year. CSC plans to hire 5,000 to 7,000 workers in India over the next two years, the company says. Still, that pales compared with rivals such as IBM, which is expected to add more than 20,000 workers in India.

Some companies will acquire rather than hire. Printer RR Donnelley last month bought Indian business process outsourcer Office Tiger for $250 million and Accenture acquired the back-office outsourcing arm of privately held software and services vendor Savista, which is based in Wichita, Kan., and has operations in Brazil and India. About 400 Savista staffers have joined Accenture as part of the deal.

Gazing At India

Indian firms are likely to get the most looks from buyers, making it likely that EDS's grab at a stake in Mphasis could spark similar moves by competitors. "Absolutely, you're going to see more of it," says Ray Lane, former Oracle CEO and now a general partner at venture capital firm Kleiner Perkins Caufield & Byers. For EDS to compete with Cognizant, Satyam, and Tata Consultancy Services, it has to lower its cost structure, he says.

EDS says it's not just interested in cheap labor. The company sees in India an abundance of workers fluent in the technologies most relevant to today's business IT environments. "We're looking for .Net capabilities, Java capabilities, and Web capabilities," a company spokesman says. Mphasis would add 11,000 Indian employees to EDS's present complement of 3,000. By the end of 2008, EDS wants to have 28,000 IT and business services workers in the country, a 14,000-employee increase, even after the Mphasis deal. EDS plans to use both acquisitions and individual hirings to make this happen. EDS employs 51,000 workers in the United States, or about 42% of its worldwide workforce.

Last month, IBM officials said the company would likely raise its Indian head count to 55,000 or more over the next year, a 40% increase over current levels. Dell said it may add 10,000 workers in India over the next three years, effectively doubling its presence there. If there is an IT services industry consolidation under way, it has a distinctly Indian flavor.

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