Indian IT M&A steps into the big leagues

Posted by: Steve Hamm on August 06

When Wipro announced today that it has a deal to buy US outsourcer Infocrossing for about $600 million, it signaled a major step up for India. This was the largest acquisition ever for the entire Indian IT industry. Wipro had bought eight companies in the past two years, but paid less than $100 million for each of them. I don’t expect a flood of large acquisitions in the US by the Indians now, but I wouldn’t be suprised to see one top $1 billion. One factor that could accelerate the pace and size of such acquistions is the rise of the value of the rupee. Analysts have talked about the problems that the rising rupee brings. Here’s a positive: It buys a lot more in the United States.

The Infocrossing deal looks like a good fit for Wipro. Infocrossing has large businesses in data center managment and health care business processing--both areas of weakness for Wipro up until now. With the acquisition, Wipro gets five data centers in the United States.

Infocrossing pulled in $229 million in revenues last year, up about 55%. Its operating revenues are in the 10% to 12% range, which is good for a US company, but much less than Wipro Technologies operating margins, which are typically in the mid 20s. Wipro says it will increase revenues by pumping more business into the existing data centers, which are using only about half of their capacity right now. It also expects to be able to save money by handling some of the remote management work from India.

Wipro has been very selective with its acquisitions. It doesn't buy companies that need to be restructured. With Infocrossing, it's leaving the current management team in place and will operate the business independently, though it looks like there will be plenty of cross-selling opportunities with Wipro's existing infrastructure management and BPO businesses.

Another thing to notice about this deal: It's not about labor arbitrage. Infocrossing's 900 employees will stay in the US. This is about capabilities. So the deal is yet another example of how the Indians are making the transition from business models based on low-cost labor to models based on putting highly skilled people in the right place for customers.

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