Cognizant's bold $1.3-bn-Belcan bet a bid to up revenue as core business struggles

Representative image

Cognizant Technology Solutions’ $1.3 billion acquisition of Engineering, Research, & Development (ER&D) company Belcan is a bet to make up for the loss in revenue from its core business. Moreover, large acquisitions have been historically challenging with onsite employees closer to clients as against Cognizant's offshoring model, experts said.

“It’s a classic case of bulking up revenue, buying business because of the inability to grow organically,” according to an industry executive who did not wish to be named.

The acquisition is a crucial attempt to diversify Cognizant's portfolio, but it also highlights the difficulties the company faces in its traditional business. In May, the Nasdaq-listed information technology firm posted a fall of 1.1 percent year-on-year in revenue to $4.8 billion for the first quarter, due to weak discretionary spending by clients.

“The question is does the company have the leadership bandwidth to make the acquisition work, that only time will tell,” the source quoted above said.

Cognizant had not responded to queries sent by Moneycontrol till the time the article was published. The article will be updated to reflect the company's views as and when they respond.

Cognizant has historically operated with a predominantly offshore workforce, most of whom are based in India, and the integration of Belcan poses challenges, analysts say. "I don’t think any India heritage company has attempted to integrate and manage an M&A with so many employees onsite," the source added.

Culture in both companies are very different, as Belcan was founded in 1958 and Cognizant was born in 1994, analysts said. And it remains to be seen how the divergent workforce will work in synergy.

Moreover, analysts pointed out a discrepancy in the number of employees listed by Belcan in its website and the number spelt out by Cognizant in its release.

Belcan’s total employee strength is shown as over 10,000 on its website, whereas Cognizant’s release pegged the number of engineers and technical consultants at 6,500. When asked about the discrepancy in employee numbers, the management was unable to give a satisfactory answer, the source said.

Additionally, the sectors that Cognizant is entering with this acquisition, such as aerospace and defence, are highly regulated and demand a different operational “mindset” compared to the commercial sectors where Cognizant traditionally excels in.

The potential for synergy revenues estimated at $100 million seem modest, despite Belcan generating $800 million annually, the source said.

When analysts asked about the impact of the acquisition on gross margin and earnings before interest, tax, depreciation, and amortisation (EBITDA), the management skipped that answer, the source said.

Gaurav Vasu, Founder of market intelligence firm UnearthInsight, noted that the company’s margin, revenue per employee, and value of services could get diluted over two or three years as a result of the acquisition.

Also read: Cognizant’s headcount declines by over 7,000 in Q1

Nonetheless, some analysts say that Cognizant will now benefit from sectorial revenue diversification and help sustain higher growth rates for a longer duration. “Currently 65-70 percent revenue comes from BFSI & Healthcare which will shift to 75-80 percent spread across four to five sectors such as aerospace and defence, automotive, industrials, BFSI & healthcare,” said Vasu.

He further expects the Teaneck-headquartered firm’s growth to improve by at least 1-3 percent, with a growth guidance of -5 to +5 percent. Cognizant will now be on table to participate in diversified IT, ER&D and digital operation deals in the aerospace and defence sectors.

A challenge Vasu highlights is the commoditisation of deals due to Belcan's Global Capability Centre (GCC) and clients from the aerospace, defence, automotive and industrial sectors. “Cognizant will have to smartly position to both headquarters and GCC with unique differentiators,” he added.

GCCs are offshore units set up by companies to deliver a range of services to their parent entities by making use of global talent, resources, and expertise.

In India, major aviation players like Boeing, Airbus, Pratt & Whitney, and Lockheed Martin have established Global Capability Centers (GCCs). Similarly, automotive giants such as Volvo, Hyundai, Stellantis, and Ford have set up their captive centers to leverage local expertise.

"The market is ripe for expansion, and Cognizant is well-positioned to capitalise on these opportunities," Phil Fersht, CEO of HFS Research, noted in his recent blog post.

Also read: BFSI global capability centres bullish on Gen AI despite regulatory hurdles