Indian IT companies are exploring an unusual route for growth: buying the technology businesses of clients and, around the same time, winning large outsourcing contracts from them.
Tata Consultancy Services Ltd (TCS) is the latest to use the playbook. On 24 August, it announced acquiring Porsche’s Germany-based management and IT consulting arm MHP for $373 million, while the carmaker has awarded TCS a five-year IT modernization contract worth $1.45 billion—its second mega-deal in less than eight months.
At least nine such transactions have taken place over the past two decades, including three in the past 12 months, involving TCS, Infosys Ltd, HCL Technologies Ltd (HCLTech), Wipro Ltd and WNS. The recent spurt comes as growth across the Indian IT services sector slows and companies seek to expand into underpenetrated markets.
But the trend also raises a strategic question: are IT firms building capabilities for the artificial intelligence (AI) era, or simply buying growth?
“While AI is dotted all over the press release, the crucial aspects appear to be access to the Volkswagen Group ecosystem and exerting power over control points of the emerging AI value chain,” said Thomas Reuner, principal analyst at PAC.
This is not a first for TCS—or the industry.
TCS’s deal comes a little more than four months after Bengaluru-based Wipro ended a nearly six-year drought by bagging a $1 billion IT modernization contract spanning eight years from Singapore-based food processing major Olam Group, marking its first mega deal in nearly six years. As part of the broader engagement, the country’s fourth-largest IT services firm would acquire Mindsprint, Olam’s IT arm, for $375 million in an all-cash deal.
Wipro has used the model before. In September 2018, the company won its largest IT outsourcing contract to date, valued at $1.6 billion over 10 years, from Alight Solutions LLC, the former benefits administration and human-resources outsourcing business of Aon Plc. As part of the deal, Wipro acquired Alight’s IT arm for about $117 million.
TCS, too, has done this before, although almost two decades ago. In 2008, it acquired Citigroup Global Services for $505 million and won an IT outsourcing contract worth $2.5 billion over nine years from the financial institution. That year, WNS acquired Aviva’s technology arm for $228 million and won an IT deal worth $1 billion over eight years from the insurer.
Infosys Ltd has used a similar model, although its transactions have not always followed the same sequence. India's second-largest tech services firm is in the process of acquiring Australian IT firm Versent Group for more than $150 million (AUD 233.25 million).
Under the acquisition announced in August last year, Infosys will acquire a 75% stake in Versent, with the remaining 25% retained by its parent, Telstra Group Ltd, Australia’s largest telecom company. The Bengaluru-based IT outsourcer extended its IT modernization project with Telstra for an undisclosed amount a month before the acquisition was announced.
In June 2023, Infosys had signed a five-year, $454 million IT management deal with Denmark’s Danske Bank, which included taking over the bank’s 1,400-person India IT centre in September that year for about $9 million.
HCLTech, too, has used the strategy. In February 2016, the Noida-based firm bought Volvo Group’s external IT business for about $138 million and won a five-year contract valued at $1.8 billion to run Volvo’s IT infrastructure.
The common thread is a way to deepen existing client relationships while adding growth. Analysts say the model can help IT services firms buy growth by accessing underpenetrated markets, while giving clients' IT units a new lease of life.
The deals are emerging as organic growth has become harder to find.
