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Why is Baring PE Asia buffing its IT services portfolio?

The private equity firm has two options before it with IT services firms Hexaware, Coforge and Virtusa. It can either combine these acquisitions to create a giant entity and harness synergies while strengthening diversified lines of business, or it can let the three companies grow individually and sell them. Which route will it take?

September 16, 2020 / 02:37 PM IST
 
 
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Private equity investor Baring PE Asia now has three IT services companies in its portfolio: Hexaware, the erstwhile NIIT Technologies (now Coforge) and most recently, US-based and NASDAQ-listed Virtusa.

The PE firm acquired Virtusa for $2 billion last week. It acquired NIIT Technologies in 2019 and Hexaware in 2013.

The company is currently in the middle of delisting Hexaware from stock exchanges. According analysts Moneycontrol spoke to, the idea is to eventually sell the company. A Mint report has pointed out that delisting came after many failed attempts by the PE firm to find a buyer.

During recent interactions, R Srikrishna, CEO, Hexaware, told Moneycontrol that delisting will have no impact on employees and that the company’s operations will continue as before.

Why now?

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So, why would Baring PE acquire another IT firm now? Analysts list three reasons:

 

  1. Market research reportssuggest that Virtusa is undervalued and hence attractive for buyers. If private equity players are looking to invest, there is no better time to invest than now.

  2. PE players are also looking for safer bets and industries that are resilient and less volatile. The IT services industry has showcased robustness amid the Covid crisis and it is a safer bet.

  3. For Baring PE, the experience with two IT services firms does come in handy and can help Virtusa reach the next level of growth.

The integration option

It is not clear yet what the company’s plans for these firms are. Industry watchers speculate that Baring could integrate all three firms since they can complement each other and become a bigger firm with a combined revenue of over $2.5 billion.

Hexaware registered $793 million in revenue for the financial year ended December 2019. Coforge's annual revenue was about $600 million for the year ended March 31, 2020. Virtusa’s revenue stood at $1.3 billion, also for the year ended March 2020.

All three firms have a huge focus on the banking and financial services segment, and with vendor consolidation underway, combining them could help drive market-share gains.

In addition, each of these companies has its own specialisation and could create a diversified portfolio.

Coforge focusses on insurance as well as travel & hospitality and is now looking to expand into healthcare. For Hexaware, manufacturing & consumer, hi-tech and professional services each accounted for about 16 percent of revenue in the June quarter. Healthcare and insurance accounted for about 21 percent of revenue during the same quarter.

BFSI apart, healthcare and communications & technology at 14 percent and 24 percent, respectively, were the key verticals for Virtusa for the quarter ended June 2020.

Clearly, combining these entities can create a strong healthcare play and at the same time give them diversified service lines.

The sale option

However, it is also possible that Baring PE will help these companies grow individually and sell them.

Jain explained that PE players invest in companies to get better returns. They are not attached to the company the way founders and promoters are and hence are likely to sell when the timing is right, he added.

In that case, it would be difficult selling a combined entity with a huge valuation. “So, they are most likely to grow the companies to a certain scale and then look for a buyer,” he added.

Jain also reasoned that if combining the entity was the focus, there was never any need to de-list Hexaware. So, growing the companies would be the PE firm’s focus, he added.

Coforge is looking to grow to a $1-billion firm in the coming year. In a recent interaction with Moneycontrol, Sudhir Singh, its CEO, said that operations would continue as before and there are no plans for either a merger with Hexaware or for a de-listing.

No roadmap has been announced for Virtusa yet, but growth would be the key focus here as well, added experts.
Swathi Moorthy
first published: Sep 16, 2020 02:37 pm

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