Can Wipro make the $1.45-billion acquisition of Capco tick?

Wipro acquired the UK-based consulting on March 4, 2021. Announcing the acquisition, Rishad Premji, chairman, Wipro, told analysts, “This is the largest acquisition in our history. It will bring $700 million in revenue. With this, Wipro will join a select league that brings end-to-end solutions at scale to our customers.”

“I said a few months ago that you will see a bolder Wipro, a Wipro that will be more risk-taking and shake up the apple cart. This acquisition paves the path to build a bold tomorrow," he added.

Capco, which has consulting expertise in the banking and financial services segment, will help Wipro grow the business from $2.5 billion to $3.2 billion, the company said.

Wipro is not new to large-scale acquisitions, but the success rate has not been great.

Not-so-successful acquisition track record

Let us take a look at Wipro’s three large acquisitions.

In 2007, it acquired US-based Infocrossing for $600 million. The acquisition included hosted data centre business, medicare in the health insurance space and ERP implementation services. It was one of its largest acquisitions then.

A decade later, in 2018, the company sold the hosted data centre business to the US-based Ensono for $405 million, since it was not aligned with Wipro’s strategic portfolio.

Wipro acquired Appirio, which included Talent-as-a-Service platform TopCoder, for $500 million in 2016. Three years later, while the company continues to be bullish on TopCoder, it divested two of Appirio’s cloud-based HR solutions, Workday and CornerStone OnDemand, to the US-based Alight solutions for $110 million.

The same year, Wipro acquired US-based HealthPlan Services, which offers software solutions to health insurance firms, for $460 million to cater to the expected demand Affordable Care Act, dubbed Obamacare, would create.

With Donald Trump as President, Obamacare was put in the backburner and Wipro took the hit. During the earnings call in October 2017, former Wipro CEO Abidali Neemuchwala said: “And just to give you a sense, over the last few quarters, we have lost on a run rate basis of about $125 million worth of annualised revenues in that segment of our healthcare business.”

The acquisition continued to generate uncertainty for the company till about mid-FY20, going by the commentary in the earnings call.

If larger acquisitions presented challenges, smaller acquisitions were no different either. Wipro’s 2005 acquisition of Spectramind, a low-end voice BPO business, was not a huge success either as the industry transitioned to non-voice-based transactions.

This, coupled with the IT industry’s performance in the consulting business, are exactly what analysts are wary of. That’s why many are wondering whether it will be any different this time.

Will it be different this time?

There are aspects to this acquisition that makes it different from the earlier ones.

Mrinal Rai, Principal Consultant, ISG, a research and advisory firm, said that one of the challenges with Wipro’s past acquisitions were flawed strategic alignment. That, at least, is not an issue with Capco.

Banking and financial services and insurance (BFSI) accounts for about 30.5 percent of Wipro’s revenues. With the acquisition, the IT major will get access to Capco's 30 marquee clients and can boost this portfolio, which has been lagging over the last few years.

Yugal Joshi, Vice President, Everest Group, said: “Wipro’s BFSI practice did well in 2017-2018 but lost some momentum in the last couple of years.”

One of the reasons for Wipro’s growth challenges in the sector, Joshi explained, was lesser onshore presence and consulting capabilities compared to other peers.

In this case, Capco fits right in, since it complements Wipro’s portfolio. Thierry Delaporte, CEO, Wipro, said during the analyst call, “In BFSI, scale matters. So combining forces will make it stronger and can confront big players to develop and take up demand that is coming from the space.”

The other advantage is the large presence in Europe. For instance, of the $700 million Capco revenue, 41 percent comes from Europe, a key focus area.

In addition, Capco will function as a separate unit and its CEO Lance Levy, will report directly to Delaporte, and work with senior leadership in the firm. This will make transition relatively easy for the firm to begin with.

But challenges remain.

Challenges for Wipro

Industry watchers laid out four key challenges that Wipro is likely to face in this acquisition.

One, cultural issues and smooth integration. While operating the entity independently might work to begin with, Wipro will need a long-term strategy to run this as an independent brand or bring it under one Wipro.

There are also concerns about Capco’s stagnant revenues. Sudheer Guntupalli, and Hardik Sangani, research analysts, ICICI Securities, a brokerage firm, said in a note that revenues from Capco have been stagnant for the past three years and is a cause of worry.

It is also not clear whether the impact the acquisition and onboarding of its 5,000 consultants will have on Wipro’s new organisational strategy. Wipro recently overhauled its organisational structure, based on geography and strategic business units, instead of business verticals such as banking, oil and gas, and retail.

But more importantly, there are also concerns about successful synergy between consulting businesses and IT services firms, where Indian IT service providers have not seen great success.

Explains Rai of ISG: “Indian IT firms are historically not seen as a consulting and strategic partner, because of many reasons. The foremost reason is during the prime growth of these firms, they succeeded by addressing the technology requirements of the clients.”

In targeting Chief Information Officers, who drive the technology requirement for the company, IT firms began to lose out on core transformation initiatives that were driven at the CXO level. Firms like Accenture, with their strong consulting portfolio, were able to tap into this opportunity.

This is beginning to change as the line between technology and business is blurring and CXOs are now directly involved in technology transformation. Here, consulting as a portfolio gains importance. It will be a huge opportunity in the banking sector, where there are significant investments happening.

For Wipro, consulting accounts for about 7 percent of the revenues, and with the right investments, this can improve.

That is why Delaporte is highly confident about Capco. “The world has completely changed for one reason. If you look at consulting five years or more, it was too far away from the technology world. Lot of consultants were not even comfortable with technology. That has now completely changed,” he said during the analyst call.

According to him, clients are looking to partner with companies that can help them not only with technology but strategy as well. That is why, Capco, with strong capabilities in the consulting space, and Wipro, with its technology services portfolio, can confront the big players in the segment, he added.