India's Tata Wins Big Citi Outsourcing Deal

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TCS claims the price is justified and argues the acquisition will help the company serve not only Citi but other customers as well.

Still, some analysts are skeptical. On Oct. 8, the day TCS announced the deal, its shares closed down 5%. Year to date, it's off 49%, compared with a 35% drop for the benchmark Sensex index. John McCarthy, a vice-president at research firm Forrester Research, warns the track record for Indian companies using acquisitions to expand their customer base is not great. "The BPO industry is littered with deals like this one that have not led to large-scale work beyond the individual clients," he says.

McCarthy believes TCS's latest buy is a long-term play. "This is about ensuring that when the dust settles [after the Wall Street crisis], TCS is well positioned to help the client clean up their mess of systems and do new projects," he says. "Anything beyond that is wishful thinking."

The TCS buy is the latest example of Indian software majors aggressively expanding to other geographies to reduce their reliance on the U.S. Over the past three years, TCS has made purchases in Switzerland, Chile, and Australia. Last year rival Infosys Technology (INFY) bought out the outsourcing business of Dutch electronics major Philips, and Wipro (WIT) acquired U.S.-based, Nasdaq-listed outsourcing outfit Infocrossing. Infosys and New Delhi-based HCL Technologies have been battling for SAP's consulting company Axon; on Oct. 10, Infosys announced it was backing away from the deal, giving the win to HCL.

Lakshman covers India business for BusinessWeek.