The current slowdown in the U.S. economy has made IT suppliers shift their focus to Europe. The Everest Research Institute’s recent study says that the present crisis along with the convergence of market models for infrastructure outsourcing, and Indian suppliers’ moving up the ADM value chain will certainly have an impact on Merger & Acquisition (M&A) activity in the IT Outsourcing (ITO) sector.

The study, “Plugging the Gaps — Mergers and Acquisition in IT Outsourcing,” includes analysis of IT Outsourcing market changes and trends driving M&A activity, examines 114 recent M&A engagements, and leverages the Institute’s database of 300 tracked captives to analyze drivers of M&A in ITO and forecast likely future acquirers and targets.

The Everest Research Institute provides strategic intelligence, analysis, and actionable insight for corporations, suppliers, technology providers and investors in the outsourcing and offshoring marketplace.

According to reports, the current U.S. financial crisis has been variously compared with the 1907 banking/credit crisis, the Great Depression and the dotcom bust. The worries have spread to Indian IT players as well. Estimates show that approximately 61 percent of the Indian IT sector’s revenues are from U.S. clients. For the top five India players who account for 46 percent of the IT industry’s revenues, the revenue contribution from U.S. clients is approximately 58 percent. About 30 percent of the industry revenues are estimated to be from financial services. However, some suggest that the current IT Outsourcing model has long term competitive advantage to be bogged completely down by the crisis.

“The economic crisis will likely affect M&A activity as North-American focused suppliers look to diversify their revenues by expanding into new geographies,” said Ross Tisnovsky, vice president, Everest Research Institute. “Cash-rich Indian companies experiencing slow growth will prompt M&A activity as will the exit of private equity firms seeking divestures from investments. We’re also seeing some large multinational companies divest in captives or use them as revenue generators.”

The key findings in the report are that “Gap in services portfolios” and “industry-specific skills acquisition” were the most prevalent reasons for two-thirds of M&A deals signed over the past five years. There is an increase in ITO acquisition and the factor to be noted is that European IT acquisitions are larger than North American acquisitions though the number count is less in Europe. Sell-off activity is a likely eventual evolution for captives and also proves commercially as well as operationally beneficial to both parent and an acquiring supplier.

By Nathesh
TMCnet Contributing Editor

Source: http://it.tmcnet.com