Information technology (IT) sector has traditionally been the most active sector for corporate deals in India, largely due to higher volumes with investment transactions in early stage ventures, and this year was no different. Indeed, more than one in three PE deals in the country was struck by IT firms and around a quarter of total money invested by PE/VC firms went to IT firms.
However, the sector saw decline in both total number of transactions (PE/VC and M&A) and value of deals compared to last year. This was led by fall in value of M&As in software services and secular decline in volume of deals across both PE/VC and strategic acquisitions.
On the bright side, the value of PE/VC deals rose 10 per cent to $2.2 billion. This was spread across 254 deals, which in turn declined 11.5 per cent compared to 287 transactions last year. The rise in value of investment was skewed due to the $360 million investment pulled in by Flipkart, the country’s largest e-commerce venture.
E-commerce accounted for a fifth of PE/VC deal volumes but a quarter of the total money invested in the IT sector this year.
Alok Mittal, managing director of VC firm Canaan Partners, which invests in the IT sector including e-commerce, said, “In e-commerce PE investments are getting more and more concentrated within few players. This represents the growing trend of consolidation, and also reinforces that trend by concentrating capital. We would expect this trend to continue into 2014, and perhaps see more M&A activity as well.”
The rest of the IT sector saw PE/VC deal value almost flat at $1.6 billion while the number of deals shrunk a bit. Prominent deals by Apax Partners (GlobalLogic), Baring PE Asia (Hexaware) and Partners Group (CSS Corp), kept the money flowing into the sector.
Decline in M&A activity
M&A transactions declined to 122 from 131 while the value of such deals almost halved to around $800 million. This was due to absence of any significant strategic acquisitions with the biggest deals in the $100 million range.
Two such deals involved e-commerce and the internet space with Naspers buying majority stake in bus ticketing site redBus and Endurance International buying a chunk of Directi.
In particular, the redBus deal was significant as the only $100 million plus acquisition of an internet services firm by a global major in a segment plagued by lack of exits for VC investors. redBus’ backers got a multi-bagger in the deal with Naspers.
However, beyond that, M&A activity in e-commerce sector was on mute. The previous year, in comparison, saw a strong of consolidation amongst etailers led by merger of firms with common investors.
The only other significant M&A deal in the sector was TCS’ acquisition of French IT services firm Alti for $97.5 million.
In contrast, during 2012 iGate completed buyout of Patni in a large transaction besides Mphases striking big overseas transaction and NTT buying Netmagic.
Sandip Sen, global CEO, Aegis Limited, an Essar Enterprise, said, “This drop in IT deals denotes a shift in the overall industry focus, more towards consolidation and debt reduction rather than growth augmentation through acquisition. The ripple from the global financial crisis still continues to be seen in transactions across key markets worldwide.”
Kunal Walia, managing partner at Khetal Advisors Pvt Ltd, says the main reason for decline in transactions since 2011 is the reduction in liquidity in the US market.
“Almost 75 to 80 percent of the market for Indian IT companies is US and it has still not recovered. Companies are now looking for niche capabilities like analytics to acquire which are not readily available in the mid-market or large cap segment,” he said.
Shining areas for 2014
Sen from Aegis notes that the shrinkage of M&A deals across IT sector is a temporary phenomenon as (SMAC) - social, mobile, analytics, cloud and domain BPM services will continue to drive markets and enable efficiencies.
“The industry has moved up the value-chain in their ability to provide high-end services like product engineering services, customer analytics and vertical based solutions. There will also be an increased emphasis on value-based services—the growth of analytics, automation, self-service, and multichannel services driven by technological changes,” he said.
Going forward, the industry will undergo a gradual change with organisations focusing on R&D services, which will drive the next level of growth across healthcare, BFSI, energy & utilities, travel and other emerging sectors
Walia from Khetal Advisors says large IT clients have consolidated their vendors from 9-10 to 2-3 vendors and Indian IT companies have suffered because of this.
"2014 will be a much better year and certainly a revival for the IT industry is expected,” he adds on a positive note. This could be bring acquisition interest in areas like platform & technology, cloud computing and data analytics.