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Small is big that is the new mantra of IT bigwigs like Wipro. With big ticket acquisitions not adding much value, the software majors now want to go in for smaller but more strategic buyouts.The big boys of Indian IT industry have been flirting with this name for a while and now there is a brand new add on. The buzz is Wipro is eyeing parts of Electronic Data Systems EDS business, the second largest global IT player.
Sources close to the company say why not after all these companies have in the past parted with their asset. Capgemini for instance sold of its healthcare unit to Accenture for USD 175 million in 2007. EDS had its consulting arm AT Kearney break away as a separate consulting company.
Wipro management had explained its stand saying, The big acquisitions like USD 2 to 5 billion will not add value to us.
So why is it value destructive for the Indian IT companies to buy the whole of EDS or Capgemini.
It could be because there are too many overlaps in the kind of services these companies offer so why acquire something which is less cost effective and makes margins as low as 6 to 7 per cent when you can ramp up in India and command three times the margin.
It would mean shutting down many of the operations and moving work offshore. The retrenchments could be impractical given the stringent labour laws in Europe and adverse political sentiments in the US when it comes to offshoring.
Besides, the financial risk is huge as well. Infosys and TCS are sitting on huge cash piles and Wipro is willing to leverage debt option and going back to the markets if the need be. But that may not be enough to swallow a USD 13 billion Capgemini or over a USD 20 billion EDS.
Nothing is impossible in the realm of business but scale is crucial for Indian IT companies to drive growth and if one of them were to get serious about one of these big ticket acquisitions there are ways to work it out.
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