Mergers and Acquisitions – A key growth strategy for technology companies during the Covid times
Blog: NASSCOM Official Blog
The Global Story
Globally, the technology sector valuations have been relatively steady over the last few months despite compared to most other sectors which have seen significant drop in valuations post the COVID-19 outbreak. However, the fall in valuations still makes a good business case for large technology companies to acquire new capabilities, who are sitting on large cash reserves.
- According to a Bain & Co. analysis the top ten technology companies in S&P 500 had a cash reserve of over $560 billion as of May 2020, which could be used to fund new deals. The chart below depicts the cash reserves of top S&P 500 companies.
- Though, overall the technology segment have witnessed resilience, decline in valuations of some technology companies have shrank since the pandemic began (which were preciously prohibitively expensive), presenting new acquisition opportunities.
New acquisition focus areas emerge to leverage opportunities in the newnormal
- Some focus areas that could see most of these targets coming from includes: digital engagement, virtual collaboration, cloud, “as-a-service-offerings”, data analytics, artificial intelligence, security and automation.
- Some recent acquisitions in the space highlight one or more of these areas:
- In June 2020, Microsoft announced the acquisition of Israeli IoT security specialists CyberX.
- Microsoft announced the acquisition of UK-based provider of robotic process automation software Softomotive in May 2020.
- In May 2020, Facebook acquired Giphy, a searchable library for movable images, or gifs. The product and team has been rolled into the Instagram division of the social media giant.
- VMware announced its intention to acquire Octarine, the virtualisation specialist in May 2020. The acquisition will support VMware to Expand Workload Security Solution into Kubernetes and Creation of Next-Gen SOC Alliance.
- In May 2020, Intel acquires Israeli Startup Moovit, mobility data specialist and journey planner app for $900 million.
The Indian Story is also driven by increasing interest to acquire….
The Indian technology leaders have a similar story and together the three top companies TCS, Infosys and Wipro had a collective cash reserve of over $13 billion as of April 2020. Also, leadership across all of them have showed interest towards acquisitions.
- TCS which is not a frequent acquirer, but had made its largest acquisition during the global financial crisis- Citigroup’s captive business process centre in India for $505 million, which helped it sign a decade-long $2.5 billion contract. According to TCS chief executive Rajesh Gopinathan in a post-earnings analyst call (April 2020), “Our largest M&A to date was actually executed at the peak of the global financial crisis. We are not shy of M&A and we believe that the best time to execute it is when nobody else is buying.”
- Wipro which has been an active acquirer of companies such as HealthPlan Services (HPS), cloud enablement firm Appirio, design consultancies such as Designit and Cooper, and smaller firms like InfosSERVER and International TechneGroup; is also looking forward to acquisition opportunities. According to Wipro chief financial officer Jatin Dalal (April 2020), “This could be the time (when) we could even look at a possible wellpriced, M&A opportunity without having to worry about whether we have sufficient cash or not.”
- Infosys completed acquisition of Simplus, a Salesforce implementation partner in March 2020. According to Infosys CEO Salil Parekh (April 2020) “We have enough of headroom and we’ll have to see if any assets come up which interests us during this period, but we are open to everything at this stage”
…across newer areas of interest
Industry analysts believe the focus of these acquisitions will be on cognitive and self-healing IT platforms and cloud-based cyber security products and patent-led products. Another key focus areas for Indian IT companies could be the captive technology centers of global corporations.
- According to Vishwakumar Nandagopal, head of India Operations at global technology research and advisory firm ISG (May 2020), “We have seen a 50% jump in captive search. Our records show that searches have gone up in March and April. Enterprises are searching for captive monetisation, those with poor financial performance and low cash to burn in the near term”
- In May 2020, HCL announced its intention to acquire to acquire Cisco’s network technology to push 5G, the deal is expected to complete by January 2021.
Overall, while the M&A bandwagon has picked up globally for the technology companies, Indian companies are yet to close any new acquisition, though have gradually started the run. However, there is still time for them to pick-up some more good acquisition opportunities, till then we will wait to see where the new investments are being made.