Indian software and services companies are on the prowl for overseas acquisitions, especially in Europe, as a stronger rupee and a skills shortage cramp their style at home.

Aided by large market capitalisations and huge cash piles, firms such as Infosys Technologies and Wipro are looking to strengthen their marketing muscle and add large clients in new regions as the outsourcing trend gathers pace beyond its English-speaking core market.

Indian IT services companies rode the first wave of outsourcing growth, helped by a large pool of English-speaking recruits and low wage costs.

But growth is slowing, because the rupee has risen nearly 7% against the dollar in the June quarter, and wages are soaring as firms struggle to find skilled staff.

Europe now has the strongest outsourcing growth in the world.

The value of new outsourcing contracts offered by European companies rose 78% in the first half of 2007 to 12.3 billion euros ($16.8 billion), according to outsourcing consultancy TPI, accounting for more than half of such deals signed globally. Global growth was just 6%.

Slow to catch on

Europe’s biggest IT firm, Capgemini employs more than four fifths of its 75,000 worldwide staff in Europe, including some 5,137 in central Europe, and has a large outsourcing centre in Poland.
“For a long time, Europe was slow to catch on to outsourcing compared with the Anglo-Saxon countries, but now it’s catching up,” TPI senior adviser Friedrich Loeer told Reuters.

Against this background, M&A deals by Indian companies are picking up in size and number, more than doubling in value to $15.26 billion and recording 108 deals in the first half of this year, according to data from Dealogic.

So far, most of this is accounted for by Tata Steel’s $12.9 billion acquisition of Anglo-Dutch steelmaker Corus in January.

But Tejas Doshi, an analyst with Mumbai brokerage Sushil Finance, says Indian IT services firms should now leverage the cash on their balance sheets. “You will see a lot more acquisition deals now than you have seen in the last three years.”

Infosys, with a cash pile of $1.6 billion and market capitalisation of $28 billion, has so far contented itself with small deals such as last month’s $28 million agreement to buy three back-office centres in India, Poland and Thailand from Philips Electronics.

Talk also circulated that Infosys may bid for Capgemini, but both companies denied the rumours.

Infosys Chief Financial Officer V. Balakrishnan told Reuters, however, that the company’s emphasis might soon change.

“The European market is very good because incrementally we are seeing more growth in Europe than in the U.S.,” he said.

“If we find some interesting opportunities there, which will enhance our presence in some of the countries like Germany and France, we will definitely look at it ... even if it is a large acquisition.” he added.

The head of Wipro’s European and American business also told Reuters in an interview last month that the company was aiming to secure a bigger slice of business from Nordic operators when they outsource their IT operations.

Need for scale

European IT services companies are cheap at the moment, relative both to historical performance and global rivals.

France’s Atos Origin, for example, trades at 13 times forecast 2008 earnings, according to Reuters Estimates, versus 22 times for India’s Tata Consultancy Services.

But European IT companies may need more small, synergy-seeking deals to reduce their cost base before they become attractive to buyers from other regions.

Momentum is already picking up, with Dutch telecoms group KPN agreeing to buy loss-making IT services firm Getronics and French IT service provider Steria buying British rival Xansa last week alone.
“Intra-European cross border M&A has accelerated and will likely be sustained by Indian IT services companies looking for a beachhead to European markets,” Credit Suisse analysts wrote in a July note to clients.
Immediate targets are seen as tier-two companies such as Atos as well as the captive IT units of larger companies such as Siemens’ SIS and Deutsche Telekom’s T-Systems, which are seen lacking the competence and scale required for a competitive market.

According to Atul Vashistha, chief executive of US-based consultancy firm neoIT, it will not be too long before larger IT services companies become prey for Indian rivals.

“As offshore players look to compete with the larger players for even larger deals and more higher end deals, the need for scale will drive them to larger acquisitions,” he says. “I expect one to happen in the next 12 months.”

Wipro Technologies is making its biggest ever acquisition. It is buying New Jersey-based Infocrossing for $ 600 million (Rs 2,460 crore) in an all cash deal. It has signed a definitive agreement with Infocrossing to acquire the latter paying $ 18.70 (six months average price) per each of its fully diluted 32 million shares, with 13% premium.

Infocrossing focusses on infrastructure management, enterprise application and business process outsourcing services. The company that employs 900 people in five different data centres — New Jersey, California, Georgia, Arizona and Nebraska — provides end-to-end remote infrastructure management solutions like server management, mainframe outsourcing, network management and security services to around 200 clients. During the fiscal ended March 3I, 2007, it posted revenues of $ 229 million with a net profit of .5 million. It has net assets of $ 300 million.

Wipro president Suresh Vaswani said the acquisition will be conducted through a tender offer, which will follow the merger of Infocrossing with Wipro subsidiary, Wipro Inc. The tender offer is subject to a number of customary closing conditions, including regulatory approvals, and is expected to be completed by December while it is expected to reflect on revenues from the fourth quarter onwards.

Wipro has made a series of small acquisitions around the world in the past few years to fill gaps in its portfolio, a process that Wipro chairman Azim Premji has called the ‘string of pearls' strategy. But the Infocrossing acquisition is far bigger than any so far.

Sudip Nandy, Chief Strategy Officer, Wipro said that "We have been mentioning in the past that in the infrastructure management space one of the elements that we were looking to address was the capability gap that we had regarding managed data center hosting servicing. We provide a range of services but we didn’t have this particular relevant. So we were looking at adding on this capability and Infocrossing provides that capability. Therefore the rationale is to provide a complete end-to-end infrastructure management solution, which we now have the capability of offering to our clients."

The deal was a little expensive at US $ 600 million because as per global benchmarks the deal sizes are about two times topline and about 9 times EBITDA and Wipro has paid about 14 times EBITDA. But Nandy countered this by saying that, "It depends on the value of the property and the amount of strategic fit that you consider within each of these properties. As far as we are concerned we think there is a very solid synergy and the fit which we have for this justifies the price that we have paid. I think its not about 14 times it will be a little less and it will work to about 12 but we think this is the right price for the property."

Infosys Technologies has announced that it has signed a multi-million dollar outsourcing contract with Royal Philips Electronicsof the Netherlands. As part of the agreement, Philips will enter into a multi-year contract with Infosys BPO to provide Finance & Accounting (F&A) services and the processing of purchasing orders. Infosys willll also acquire three shared service centers located in India, Poland and Thailand from Philips. The contract is amongst the largest Finance & Accounting BPO engagements from India and will expand the Company's global network, particularly strengthening its European operations.

The company says that the deal size is about $ 250 million. Philips. The deal will be margin Neutral and is seen in line with Infy's own. The deal enhances Infosys's capability in the Financing & Accounting space.

The deal extends the company's global network with new centers in India, Poland and Thailand. "Global corporations require transformation partners like Infosys to enhance their competitiveness in the flat world," said S. Gopalakrishnan, CEO, of the Company. "We are excited to partner with Philips to take their F&A and procurement functions to the next level of transformation," he added.

The deal with Philips reinforces the Company's leadership position in transformation-based BPO services. The Company's BPO has seen significant growth of over 70% in revenues and an increase in client base of over one-third in FY 2007.

"During our interactions with the Philips employees, we found them to be very bright with a high level of energy and strong skill-sets. We look forward to welcoming them to the Infosys family," said Amitabh Chaudhry, CEO of the Company's BPO. "The deal will further enhance our capabilities and make us one of the top 5 players in the F&A outsourcing space in the world."

Kolkata-based Allahabad Bank (AllBank) is making a pitch for a controlling stake in at least one South-based private bank. AllBank, which has a capital of Rs 447 crore, has started the process and has short listed South Indian Bank and Lakshmi Vilas Bank as possible targets, ET report says. It has mandated Ernst & Young to identify block holders of equity in both these banks, so that the acquisition process can be streamlined.

AllBank Chairman and Managing Director AC Mahajan was not available for comments and Executive Director SK Goel also refused comments. However, AllBank is on the prowl to strengthen its presence in the South and an acquisition would help it expand its footprint there.

Both South Indian Bank (SIB) and Lakshmi Vilas Bank (LVB) seem to be a good fit in AllBank’s scheme of things. AllBank has less than 100 branches in the four southern states while SIB has nearly 500 and LVB some 230-odd branches across the country, of which the majority are located in the South.

The managements of both SIB and LVB have denied any knowledge of the move. SIB Chairman VA Joseph said: “The bank is growing and has an all-India presence. We don’t want to lose our identity. In any case, no one has approached us.” LVB General Manager R Sridharan said: “No bank is talking to us. It will not be easy for banks to take over a bank like us, where the shareholding in widely distributed and no promoter has any significant holding.”

Banking industry sources, however, said negotiations are on for over six months. According to senior Reserve Bank of India (RBI) officials, the central bank primarily examines the intention of the predatory bank before allowing it to acquire any other. It also determines whether depositors’ interest would be safeguarded in the context of such a takeover. A predatory bank also needs to take prior clearance from the RBI for acquiring more than 10% stake in a private bank.

At the other end of the spectrum, Securities & Exchange Board of India (SEBI) rules demand that the predatory entity should come out with an open offer or announce a swap ratio of shares or offer both options to existing shareholders of the targeted entity after acquiring a majority stake.

The National Stock Exchange (NSE) data on the Thrissur-based SIB’s holding structure as on March, 2007 show that foreign institutional investors hold 41.84%, domestic banks and financial institutions collectively hold 4.84%, insurance companies 0.88%, mutual funds 0.99%, bodies corporate 5.02%, individuals 46.39% and other trusts hold 0.04%.

Within the bank and FI category, Kochi-based Federal Bank holds 4.59%. The bank has a paid-up equity capital of Rs 70 crore and reserves of Rs 635 crore. In fact, SIB is planning to issue two crore fresh shares shortly by way of qualified institutional placement.

The shareholding pattern of Karur-based LVB shows that promoters hold 0.79%, banks and FIs 9.02%, insurers 0.45%, FIIs 1.67%, corporate bodies 20.49%, individuals 67% and others hold 0.58%. Within the bank and FI holdings, Federal Bank holds 4.76% while Indian Bank holds 3.43%.

Anglo-Australian mining giant Rio Tinto has tabled an all-cash offer for Montreal-based Alcan Inc. valued at US$ 38.1-billion. The friendly takeover deal will create the world's biggest aluminum producer. Alcan's board of directors has unanimously recommended that shareholders accept Rio Tinto's all-cash offer of US$ 101 per share. The offer represents a premium of 32% over the current share value of US$ 76.03. The offer is also at a premium of 65% on price on Alcoa's takeover bid on May 4.

Alcan's board unanimously recommended Rio Tinto's all-cash offer of US $ 101 per share. But the offer is subject to conditions: 66.67% shareholders support, break fee of US $ 1.05 billion. Alcoa had withdrawn offer for Alcan after Rio Tinto- Alcan agreement on deal of US $ 101/sh. The offer is one-third more than Alcoa was bidding, at US$ 28 billion (€20.4 billion) for Alcan

Funding

The ratings on Rio Tinto has been put on watch negative. The funding for the offer will be wholly debt. They see consolidated net leverage rise to around 2.8x, despite low net leverage of 0.3x as at FYE06. The leverage at this level is high for the current rating. Also the timing of the transaction is at the top of the current commodity price cycle.

New Organisation

The new company will be called Rio Tinto Alcan, headed by Dick Evans-president and CEO of Alcan. The aim will be to enable new company to capitalise on Skyrocketing demand for metals in China and India. Rio Tinto Alcan would be largest global producer of aluminium and bauxite. Combined company will be a powerful hold over key materials in aluminum production. The transaction is expected to create a new global aluminium industry leader in bauxite, alumina, power, aluminium and technology.

They will have a strong pipeline of attractive growth projects for the future and add to that Rio's presence in Quebec and Canada operations. Rio Tinto expects acquisition to be earnings and cash flow per share accretive to Rio Tinto in first full year of consolidation. Overall anticipated post tax synergies from the transaction are expected to be around $ 600 million per year.

Synergies

Rio Tinto already has a major bauxite operation in Australia, as does Alcan. Rio Tinto is world's eighth-largest aluminum maker and second-biggest iron ore producer. Alcan is a leading supplier of bauxite, alumina and aluminum. Alcan acquisition will diversify earnings away from iron ore and copper. Alcan has a high quality upstream asset portfolio with a sustainable low cost position through its excellent access to long life hydro power.

A dozen bidders are in the race to acquire the local brokerage Sharekhan Securities. Sources close to bidding process said financial bids would be opened on Saturday April 28. Among the bidders are Goldman Sachs, TPG, Blackstone, 3i, City group, e*Trade, Argonaut Group and Baring.

The broking outfit is believed to have been valued at around Rs 800 crore.

Sharekhan, the retail broking arm of the Mumbai-based financial services group SSKI, is among the top 5 retail brokerages in the country with over 100 branches across 150 cities. Shripal Morakhia and his family hold around 37% in the firm. Private equity investors General Atlantic Partners, Intel Capital and HSBC Private Equity together hold around 45% in Sharekhan and the balance by employees.

When contacted by ET, Mr Morakhia said they have received good response from strategic as well as financial investors. "The company is currently at a stage where it requires funds, and as promoters, we do not have resources. I strongly believe that the company should not suffer due to paucity of funds, and hence, we are in the process of inviting investors on board. We will see what is the best option for the company," he said.

Responding to the possibility that Mr Morakhia may exit the company by selling the entire promoter stake, he said: "If the buyer insists on a controlling stake, I won't have an option but to exit."

Some of the existing private equity players — General Atlantic Partners, Intel Capital and HSBC Private Equity — are also looking to exit, if they get a "good valuation".

Foreign financial services majors have been eyeing the booming retail equity brokerage business in India. In May 2006, ABN Amro became the first international banking group to enter the retail equity brokerage space in India through the organic route.

Subsequently in October, French banking group BNP Paribas bought 33% stake in the Kochi-based broking outfit Geojit Securities for Rs 207 crore.

Another US financial services giant Goldman Sachs too will start its brokerage services in India, after it received the clearance from Sebi. Citigroup has also announced its intention to enter the space.

Though the news of the takeover of Air Sahara by Jet Airways is yet not official, in all probability, it is a struck deal . Nine months after calling it off, Jet Airways is understood to have negotiated a takeover of Air Sahara, at a much lower price than the $500 million (Rs.2300 crores) offered in January 2006.

But financial analysts are divided in their opinions about whether the deal will elicit long term benefits.

They feel that the merger would strain the profitability and the balance sheet of Jet Airways in the near to medium term, before the merger can fully realize the benefits arising out of the synergies.

However, they are unequivocal in their opinion that the deal is a real steal for Jet Airways.

“Win-Win Situation” for Jet Airways

Jet Airways is likely to benefit out of this deal in more than one ways.

According to Ganesh Shanbhag, Promoter, SMS Financial Services P. Ltd., “This is a win-win situation for Jet Airways. The take-over has propelled Jet Airways into the Top-500 companies in India. But importantly, this (the deal) will enable Jet to ply over a broader expanse, making it a pan-India network without phenomenal additional investments in logistics and infrastructure. Given that Air Sahara operated of several routes that were different from those of Jet’s, Jet Airways need not make any duplicated investment. Only a sprucing up of the Air Sahara fleet would suffice.”

While Jet's competition with Air Sahara has been absorbed through this deal, Air Sahara's performance had been lagging, so this deal augurs well for both, opines Upendra Kulkarni, Fortress Financial Services Ltd.

But Gaurang Shah, Geojit Financial Services, has a different take. Though not as optimistic about the deal, he thinks that Sahara too had something to gain. “Sahara’s aircrafts were aging and its cash flows were stressed.”

Not all Issues resolved

There are several issues that have aroused a sense of caution for analysts like Shah.

The changes in the ATF (Aviation Turbine Fuel) prices or a further rise in crude oil prices may exert immense pressures on the margins earned by players like Jet. Shah doubts if they can sustain it.

The decision whether the possession and ownership of Air Sahara’s infrastructural facilities will go to Jet, still has to be taken by the DGCA (Directorate General of Civil Aviation). The dry and wet lease agreements and the corresponding tax liabilities also need to be considered, adds Shah.

Long Term

According to experts, Jet Airways may see competition from new regional airlines, and in the short term it may feel the pressure.

Surbhi Chawla, Research Analyst at Angel Broking says, “Jet Airways has started feeling the pressure of the overall competitive environment. As on Dec’2006, Jet Airways and Air Sahara both reported running in losses and lost a significant market share after the deal was announced. Thus, at the current valuations been indicated, we believe the merger would strain the profitability and the balance sheet of jet Airways in the near to medium term, before the merger can fully realize the benefits arising out of the synergies”.

But Shanbhag feels that such situation was estimated from before. However, he maintains his stance that both the players of the deal have gained.

“On its part, Jet can now have an option of entering the ‘economy’ sector by utilising Sahara’s fleet for those purposes, which was a sector unexplored by Jet. Else, it can continue to ply as a ‘Premium’ player as it always has. So it’s a best of both worlds for them.”

And probably, this optimism has induced the investors too. Jet Airways scrips were up on both, the Sensex Rs 644.85 (0.11 %), and Nifty Rs. 645.40 (0.23 %) at the market-close on Tuesday.

The talks between the two companies are taking place through an arbitration channel. Its arbitration order is expected on Wednesday, 11th April 2007.