Can acquisitions help Wipro join the big league?

While most Tier One Indian IT services firms are still struggling to take the next big leap for taking on the Global Big Five, Wipro Technologies seems to have discovered the DNA for pursuing inorganic growth effectively. Pankaj Mishra analyses the company’s recent acquisitions and says these initiatives will provide new, robust growth engines to Wipro

Led by Azim Premji, Wipro has what is perhaps the most effective acquisition strategy in India IT Inc.

It has been a tale of more misses than hits. Cambridge Technology Partners, Sapient, Razorfish and several other firms were at different times potential acquisition targets for large Indian software services companies, but none of them were actually acquired by Indian firms. The recent unfolding of Wipro’s diverse acquisition portfolio is a blueprint for its Indian counterparts to pursue effective inorganic growth. Polaris, Pentamedia and DSQ Software would definitely like to replicate the same model on different lines.

Sangita Singh, head of Strategic Marketing at Wipro Technologies describes Accenture and Wipro at two extreme ends of the IT services pendulum. “Companies like Accenture are now adding offshore delivery, while we are bringing more domain expertise for adding business consulting to our portfolio,” she says. Wipro’s acquisition of American Management Systems (AMS), Nervewire and Ericsson’s Indian IT R&D operation will enable it to seek high-end consulting assignments and also bid for large outsourcing deals.

The acquisition philosophy
Wipro has established a small but astute mergers and acquisitions (M&A) team headed by P R Chandrasekar, vice president, New Business Development.

An ex-GE professional, Chandrasekar is the man behind the company’s inorganic growth initiatives. “My responsibility is to drive Wipro’s inorganic growth initiatives on a global basis. Specifically in M&A, I have a small dedicated team working with the verticals/SBUs and external agencies, defining and generating deal flow and involved in the analysis and evaluation process,” he says. This team includes personnel from finance, legal, tax, HR and the respective business units under focus.

The targets
“Wipro’s acquisition of Nervewire and its earlier acquisition of AMS’s energy industry practice gives the company an installed base of customers plus strategic consulting expertise in industries that are already doing a lot of offshore outsourcing. The combination of high-end consulting and commodity services provides Wipro with the opportunity to capture a larger share of the complete IT lifecycle business,” says Stephen Lane, director, IT Services Research, Aberdeen. But there is a word of caution: “The strategy is sound. The question is how successful Wipro will be in executing it,” he adds.

In the last few quarters, Wipro has also been aggressively hiring professionals from Accenture and McKinsey to build consulting expertise. An acquisition like Nervewire brings a strong consulting front-end to the company.

Though many feel Wipro missed out on acquiring some ‘hot’ targets like Cambridge Technology and Sapient, the recent acquisitions reflect a well thought out strategy. Not only are the targets diverse in terms of service lines; they are also quite strategic if we look at the issue of client comfort in offshore outsourcing. According to Gartner, by 2004 almost all Fortune 500 companies will go for offshore outsourcing.

The catch is, they will prefer those vendors that have a well-defined presence in the countries they are headquartered in.

Sangita Singh says that Spectramind already gets 10 percent of its revenues from Wipro’s clients

“Transferring risk is becoming a viable option for decision makers, especially to companies that have an onshore legal presence and assets. After all, if a business relationship falls apart, it makes more sense for a US company to sue a supplier in Manhattan or Milwaukee than in Mumbai, Moscow or Manila,” says an Aberdeen report released recently.

AMS and Nervewire will definitely influence outsourcers to give projects to Wipro as the former imparts proximity and comfort to clients/outsourcers. The global energy practice, acquired by Wipro, has a team of 90 domain experts and IT consultants across USA and Europe. The acquisition brings to Wipro more than 50 client relationships with 15 active engagements across Europe and the USA. This strong client base includes an entire range of entities, including investor owned utilities, public power utilities, regional transmission companies and independent system operators.

Synergies
Spectramind, Wipro’s BPO arm, gets around 10 percent of its revenues from Wipro clients and according to Singh, this will go up. A comprehensive BPO offering coupled with an established clientele in IT services will help Wipro in bidding for bundled contracts.

Companies like Accenture have been selling bundled services (IT services + BPO) for long and this strategy has definitely proved to be fruitful.

The BPO acquisition by Wipro will certainly help the company in pitching for bundled contracts. IBM Global Services was awarded a $2 billion deal by NTL Inc. that covers all operational IT services, call centre management and bill processing. Outsourcers are increasingly looking at bundled contracts because it allows them to deal with a single vendor.

While AMS strengthens the company’s energy and utility practice, Ericsson’s Indian R&D arm positions it to bid for large outsourcing deals in R&D services. Wipro was earning around $5 million from Ericsson each quarter.

Nervewire, which brings a team of 90 domain experts catering to various segments within the banking, financial services and insurance (BFSI) space, is a perfect fit for Wipro’s growing financial services business. Nervewire also brings over 40 client relationships with 20 active engagements. Founded in 1999, the company has a revenue run rate of $20 million, but is still making losses. “Nervewire made for a good acquisition target because it was not making profits,” says Singh.

Multi-year deals
The acquisition of AMS’s global energy group and Ericsson’s R&D arm bring CEO-level contacts to the company. The combined addressable market for energy and utility services is around $4 to $5 billion annually. Most large outsourcers believe in dealing with vendors having the scale to take up large contracts and manage their systems for years. These multi-year deals are key to any Global Big Five strategy as they ensure a perennial revenue flow.

With an offshore bandwidth larger than any MNC in India and the domain expertise of AMS, Nervewire and Ericsson, Wipro can now bid for large deals. There are outsourcers like P&G who do not invite bids from relatively small vendors due to lack of scale.

The combination of high-end consulting and commodity services provides Wipro with the opportunity to capture a larger share of the complete IT lifecycle business, says Stephen Lane

The rationale
The sceptics monitoring Wipro’s acquisitions believe that the company did miss out on acquiring Sapient. But the bigger question is—was Wipro ready to make an acquisition of that scale? Cash reserves are not the only thing you take into account while acquiring.

“Companies such as Razorfish and Sapient rose by floating on top of the dot-com bubble. Moreover, they were highly entrepreneurial and their core business offerings were based more on creativity than the deep technology and business process expertise that is demanded in the current market. On the other hand, most major Indian services companies are highly centralised and hierarchical and follow disciplined processes. I just don’t see how the two different cultures could have meshed,” argues Lane. He also justifies Wipro’s acquisitions. “The acquisitions that Wipro has made to date would seem to be a better fit for the company at both the business and business culture levels.”

As an analyst points out, being a global company means acting like one. Part of moving up the services value chain and coming closer to customers at the executive level means giving geographic and vertical industry business units some degree of autonomy.

A final take
In the past, many analysts and industry observers have been terming Wipro as a ‘conservative’ company and Infosys with its higher market capitalisation as the poster child of the Indian IT services industry. The recent acquisitions made by Wipro reflect an astute roadmap to growth. That small, strategic acquisitions are better than large, full-blown ones has already been proved in the past.

For example, the jury is still out on the merits of Cap Gemini’s acquisition of Ernst & Young Consulting and some analysts are questioning how long it will take before PwC Consulting will become a fully integrated part of IBM Global Services.

What remains to be seen is how far these initiatives are going to help Wipro in joining the Global Big Five league.

Bringing value to Wipro