Introduction: This article is based on the findings of ongoing research by the first author on M&As in Information Technology Sector in India and experience of second author as a practitioner of many M&A deals by Wipro Limited.

Indian IT Sector has a very significant place in Indian Economy. It earned aggregate revenue of US$ 100 billion in 2012-13, which included approximately 77% share from exports as per the survey of NASSCOM and its contribution to India’s GDP and exports were 7.5% and 25% respectively in 2012-13. It employed 2.8 million people directly and 8.9 million indirectly in 2012-13. Also, the computer software and hardware sector has attracted FDI worth US$ 8.77 billion between April 2000 and September 2013.

In India, ICT is the second most vibrant sector after Banking and Finance in M&As (Kar, 2013). The factors contributed to increase in M&A activities in this sector were reforms process in India and globalization, availability of Internet and web based developments in 1995-96, entry of foreign players and diversification of established players due to huge potential for growth. According to Varma (2009), the period between 2000-10 witnessed an unprecedented boom in outbound FDI activity, led by overseas acquisitions of firms in the IT and pharmaceutical sectors motivated by the search for markets and strategic assets directed largely at the developed world.

This article investigates the trend of M&As by Indian IT companies across the years and pattern of locational distribution of acquirer and target companies. Since, M&A constitutes an important component of the investment undertaken by companies, this is aimed to throw some light on the implications for policy measures by the concerned Union and state governments to attract investment across the regions.

Data

The time period for the trend analysis is from 2000 to 2015. We have dropped the data before 2000 as there only few deals had taken place in this time period by Indian IT companies despite the fact the overall growth and M&As in IT sector in India in 2000s were the outcome of cumulative policy related efforts done by the Union and some state governments in 1990s including the introduction of the New Telecommunications Policy 1999. Results reveal that there were 209 Indian companies, which got involved in total 999 M&A deals in IT sector. Data was collected from various secondary sources such as Websites of CMIE Prowess, Bloomberg, SEBI, BSE, NSE, DealCurry.com, Various IT Companies, Money Control, IndiaInfoline, Wikipedia etc and Newspaper reports.

Trend

It can be observed from the figure 1 below that the trend of M&As by Indian IT firms is not one-dimensional. After fluctuations between 2000 and 2003, there is increasing trend since 2003 till 2007 and then there is a decreasing trend till 2013. However, in the last year there was the sharpest increase in deals by Indian IT companies.

Figure 1:  Distribution of total M&As by Indian companies in IT Sector

in 2000 – 2015

              Source: Based on data collected by authors

The most remarkable part of this trend is the decline between 2007 and 2009. This is the exact period of economic recession the US National Bureau of Economic Research (as per the official arbiter of US recessions). Results in table 1 show that all international destinations got affected quite severely and much more than domestic deals. It also reflects the resilience of the Indian Economy. The results are in contrast to Reddy, Nangia & Agrawal (2014) who found that after the crisis period emerging market countries have taken advantage of the attractive asset prices in developed countries and increased their foreign acquisitions. It must be due to the fact that despite attractive asset prices, the predicted business climates have not been rosy all these years to motivate the investors. However, the motivations of Indian companies for Indian market did not dampen as much as for the international market during recession.

Another feature emerges from the trend is that the two UPA government regimes (2004-2009 and 2009-2014) have contrasting slopes for most of the years. Despite the recovery after recession, the magnitude of M&A deals are not as high as it was immediately before 2008. It could be due to dearth of policy regime impetus under UPA II. The sharpest increase in M&A in the last year coincided with Union government change in India. There seems a hope among the business community of upturn with the regime change but it is only possible if reforms work on the ground. Among the reforms, GST and labor laws are the most important to motivate business community for more investments. However, some initiatives by the new Union Government like Skill Development Scheme, Digital India Program, Start Up India Scheme etc have good potentials to provide encouragement to the IT sector.

Pattern of distribution of M&As

Table 1 shows the pattern across domestic and international destinations. We can see that total number of domestic deals (418) is less than total number of international deals (581) and only in four times (years) domestic deals outweighed international deals.

Table 1: Distribution of M&As by Indian companies in IT Sector in 2000 – 2015

Source: Same as Figure 1

USA unanimously dominated for all the years with amounting 56% of all international deals followed by distant second UK (10%) and third Singapore (5.5%). Even continent wise, Europe is distant second with 22.5% followed by Asia (excluding India) (13%) with deals occurred in 19 countries in Europe and 12 countries in Asia. The country wise pattern of M&As is very similar to the pattern of exports by Indian IT sector to these countries.

There would be various reasons for this striking feature. One reason could be that USA provides the market and the companies, which got acquired there, are not very big but augment capability for the Indian companies. Second reason could be that since the share of export is very high in Indian IT sector vis-à-vis domestic revenue and other sectors of the economy, M&A must be complimenting the exports by IT companies by having a subsidiary as a local branch at the destinations of exports. According to Rhizor (2012), Indian outsourcers face the reality that they can no longer just outsource from India — clients are now demanding local offices and truly global footprints. This is leading to the increasing level of Cross Border M&As. Another reason could be agreements with these countries like Information Technology Agreement in 1997. Fourth reason could be the changes in policies in destination countries. For example, in the coming years, there could be more acquisition towards the USA as Choudhury (2015) reported that USA has increased the cost of H1-B and L-1 visas to double for Indian workers and also, there protectionist law is getting framed in which they wish that any company serving to USA clients should have a certain minimum percentage of employees located in the USA. This requirement can be more easily fulfilled by inorganic route for the companies.

As per the pattern of distribution of domestic destination, Bengaluru, the Silicon Valley of India dominates the list with 24% of total share (101 M&As) followed by Mumbai, Chennai, Hyderabad and Delhi. So, the South Indian region ranks 1 with 50% share and West India ranks 2 with 30% share. The distribution of deals across the domestic destinations is similar to the organic growth in these cities with Bengaluru, Pune, Hyderabad, Chennai and NCR as the leading IT hub. Thus, the distributions of both organic and inorganic growth are very skewed in India and needs government intervention to balance the pattern.

Looking at the relationship between domestic acquirer and target location in table 3, the results suggest that in 42% of cases acquirer and target companies had headquarters in the same location and thus making the same city located firms as the most preferred deal partner.

Table 3: Pattern of Domestic Acquirer-Target Headquarters for Indian IT Sector

Source: Same as Figure 1

Growth of IT sector in India is in coherence with the location of setting up of STPI and so is the M&As. The spread of STPIs in other locations would likely to change the distribution of location of deals in India.

Conclusion

As it can be observed that (besides firm level factors and exogenous shocks which we did not discuss,) policy framework of concerned governments determined the trend and pattern of distribution of M&As by Indian IT sector companies, which in turn was influenced by growth and investment in this sector. Thus, it is imperative to facilitate further growth and equitable distribution of IT Sector in India with appropriate policy measures.

References

Kar R.N. (2013): The story of Indian Mergers and Acquisitions: From evolution to present waves, The Discussant, Journal of CRDJ, Volume 1, No. 3, July.

Reddy K. S., Nangia V. K. & Agrawal R. (2014): The 2007-2008 global financial crisis, and cross-border mergers and acquisitions: A 26-nation exploratory study, Global Journal of Emerging Market Economies, 6(3), 257-281, Sage Publications.

Varma S. (2009): International Venturing by Indian IT Firms: A Motive Analysis Firms: A Motive Analysis, Journal of Emerging Knowledge on Emerging Markets, vol 1, issue 1.

Choudhury Uttara (2015): H1-B and L-1 visa hike: How India’s IT industry is a punching bag for American protectionism, link: http://www.firstpost.com/world/h1-b-and-l-1-visa-hikes-how-indias-it-industry-is-a-punching-bag-for-american-protectionism-2552186.html, viewed on 20/12/2015.

Rhizor G. (2012): Wipro Case Study Shows Penchant for Acquisitions, Valuation & Deal Insights, Martinwolf, link: http://www.martinwolf.com/Websites/martinwolf/images/Article_ Press_Clips/August%202012%20VDI/08.13.12_WiproCaseStudy_VDI.pdf, viewed on 02/04/15.