IBM acquisition proves multinational
might By Indrajit
Basu
KOLKATA - Ask any Indian information
technology (IT) services company about competition that
they might face from their multinational counterparts
and out comes the reply: "They can't beat us."
But Wednesday, with the acquisition of unlisted
Delhi-based Daksh eServices, one of India's largest
IT-enabled offshore service provider companies, IBM, the
US$89 billion technology behemoth, has conveyed the
message that Indian IT companies that consider
themselves invincible had better be on their guard.
In the largest deal in the history of the
country's IT-enabled services sector, IBM announced that
through its subsidiary, IBM Global Services Worldwide
(revenue $42.6 billion), it has decided to buy out Daksh
(revenue $60 million), the third-largest business
process outsourcing (BPO) company in the country.
Although IBM has not officially disclosed the financial
details of the deal, sources close to Citigroup, which
along with General Atlantic Partners and Actis (formerly
CDC) hold around 65 percent in the company, revealed
that IBM has agreed to pay $170 million to the Indian
founders and foreign equity holders for this buyout. The
deal, which is IBM's first acquisition in India, is
expected to be completed by May. Until now, IBM's India
strategy has been purely organic.
"India is one
of the fastest growing economies in the world and an
important market place for IBM," said Abraham Thomas,
IBM's general manager of India operations.
The
company's press release said: "The acquisition of Daksh
will enhance IBM's business transformation capabilities
in areas like customer relationship management and
financial management services; in industries like
banking, insurance, retail, technology,
telecommunications and travel and transportation. This
will also increase the scope of IBM's global network of
22 business transformation delivery centers, adding
capabilities in India and the Philippines."
Indeed, the IBM-Daksh deal demonstrates that
multinational corporation (MNC) IT services companies,
in their ardent bid to succeed in India and to grow in
the global IT services space that is rapidly moving
offshore, are learning the ropes of the global delivery
model as fast as they can. The global delivery model
enables a company to provide integrated services and
support the accessing of an extensive global network of
resources, technology and facilities. The model fuses
the complementary skills of various types of outsourcing
services in multi-disciplinary, cross-border teams.
But IBM is not the only one. Other key MNC
players like Accenture, EDS, Cap Gemini E&Y and CSC
are picking it up fast. "With gross margins of over 45
percent, IT services are the most lucrative part of the
global consulting services and that's why global majors
are adopting the offshore [global delivery] model
quickly," says Salil Parekh, chief executive officer of
Cap Gemini E&Y (India).
And the reason
everyone is focusing hard on India is because this is
where the global delivery model starts. MNCs say that
even though the global delivery model by definition
means accessing an extensive global network of
resources, it is really "make in India, sell in US" that
counts. "More than 80 percent of the delivery strength
still lies here [in India]," says a consultant from
Cognizant Technology Solution, the Nasdaq-listed IT
services company that claims it "brings out the best of
both worlds through its global delivery model".
According to Sujay Chohan, a BPO analyst at
Gartner, "It [the IBM acquisition] is clearly a sign of
consolidation in the industry, and that the MNCs will
use the acquisition route." Indeed, consolidation in the
local IT-enabled outsourcing services is also fast
becoming a reality because it instantly boosts a MNC's
capability in delivering low-cost services from India.
By bringing Daksh into its fold, for instance, IBM
India's head count will shoot up from 9,000 to 15,000
"cheaper India-based" employees. This makes IBM the
largest MNC information technology service provider in
the country, overshadowing its rival Hewlett Packard,
which has around 3,000 people, and Accenture, which also
has about 3,000 employees, and, reportedly, is adding
250 every month.
Analysts add, after the top
rung BPO providers like Daksh eServices, the mid-sized
BPO companies in India are next on the radar of
international companies for acquisition. According to
them, mid-sized companies like Tracmail, vCustomer, 24/7
Customer and eFunds could be a few interesting
acquisition targets for global IT companies.
Aside from large MNCs, mid-sized IT outsourcing
companies from across the world too are currently on the
prowl for acquisitions in India in their pursuit to
build the offshore capabilities, particularly for the US
markets. According to consulting firm Gartner and NeoIT,
an IT consulting company that deals with outsourcing,
there are close to half a dozen such companies that are
evaluating mid-sized BPO companies in India. And
according to Frost & Sullivan, the next six to 12
months will see more acquisition deals - especially
among the mid-sized companies.
Meanwhile,
reports suggest that right after this Daksh buyout, IBM
is also looking at restructuring its software business
in India. IBM India, according to R Dhamodaran, vice
president of IBM India Software Group - which is so far
offering stand-alone solutions in its five product
categories - will offer solutions and services wrapped
around its existing products.
In the past six
months, IBM realized that customers are looking at
customized end-to-end solutions along with services
following. The company is reorganizing the resources
within the software group in India to cater to the
customers globally, Dhamodaran said.
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