US shows interest in Indian services cos for M&A

Three information technology (IT) deals in the United States (US) worth close to USD 23 billion made one thing pretty clear that technology product companies want to buy services companies to augment their offerings. That acquisition strategy has brought Indian service companies in to focus who could be potential targets. CNBC-TV18's Kenan Machado reports.

Below is a transcript of Kenan Machado's comments on CNBC-TV18. Also watch the accompanying video.

HP offered to buy EDS for USD 13.9 billion in May. In September, Dell offered to buy Perot Systems for USD 3.9 billion and then a week later Xerox offered to buy ACS for USD 5.5 billion. This made dealmakers sit up and take notice of three pure play tech product companies buying two service companies. The reason for this is to offer a more holistic IT hardware and service offering. Experts say that this gives better pricing advantage.

Milan Sheth, Partner - Technology Practice, E&Y said that certain markets do buy services as a total package which is a combination of hardware, network, software and integration. According to me, in those situations, if you are a software, hardware or a network company, or the nature of alliances play a large role and if you have combined capabilities, obviously it gives you an added advantage in pricing it properly. Some experts say that the new flavour of the season will benefit Indian companies as they may be looked at by service-hungry multi national companies (MNC) product companies.

Peter Bendor-Samuel, Chief Executive Officer of Everest Group said that the HP acquisition of EDS and the Dell acquisition of Perot and the Xerox acquisition of ACS demonstrate that there is a significant hunger or desire to integrate product and services. Some of the best service companies of the world are Indian companies and I think they will be looked at very carefully to see if they make a strategic fit. So does this explain the recent increase in the valuations of Indian companies? The Nifty it index is up 20 times its price to earnings multiple and 14 times its fiscal 2010 EBITDA future earnings.

Uday Bhansali, Executive Director of Kotak Investment Banking said, "I think it's not so much to do with the recently announced transactions of ACS and of Perot Systems. It is a general uplift in the demand, greater visibility in terms of the IT budgets and a general recovery of the US markets, particularly financial services business which is led to this optimism and a gradual rise in the valuations of it stocks." 

Investment bankers and consultants say Indian tier two IT companies will be prime targets for acquisitions. The names of Patni, Polaris software, Mastek have been doing the rounds but none of these companies have made public announcements of pursuing such a transaction in Mumbai.