IT majors worried about cascading effect of Dubai crisis

MUMBAI/BANGALORE: As Dubai World, the emirate’s investment firm seeks more time to repay almost $60-billion debt, India’s top tech firms fear
that the once lucrative West Asia market for outsourcing can enter a prolonged recession and customers in other top export markets of the US and Europe may exercise more caution while making outsourcing decisions.

Tata Consultancy Services (TCS), Infosys Technologies, Wipro, HCL and Patni Computer Systems are among Indian tech firms serving telecom, banking and other customers in the West Asia region. Dubai, the biggest commercial hub in the region saw home prices plunge by nearly half from 2008 levels, reflecting the worst real estate slump during the global recession, according to Deutsche BankAG.

“Global confidence is coming back. We were hoping for more spends. But now the confidence of our customers is shaking. I expect they are going to be a bit more cautious about spends and will not open up so much. Budgets were getting firmed up in December—clients will now relook at the whole thing,” said a senior software executive with one of the firms that was looking at the West Asia and Africa as a growth markets. Publicly, though, few firms are willing to admit to these worries.

While Wipro counts Qatar Petroleum and Road and Transport Authority of Dubai among its top customers, TCS serves Saudi Telecom. Domestic rivals Mahindra Satyam also counts Dubai Municipality and National Bank of Dubai among its key customers in the region.
Wipro’s Anand Sankaran said the crisis was not entirely unanticipated as reports of people in Dubai abandoning their cars in airports because of the economic slowdown have been around for 9-12 months. “To mitigate this risk, we started looking outside Dubai,” he said. Wipro’s IT business in the West Asia is around $80 million and its Dubai business is 15-20% of it.

Apart from exposure to Dubai, the impact on companies could be lower IT spends from West Asia, which was perceived to be a growth market. Tech Mahindra had announced several wins from the West Asia and multinationals like CapGemini had appointed a partner-level executive to open up the market, as opposed to handling it from its UK office earlier.
But possibly more worrying are Dubai’s linkages to the financial world. “Dubai has a lot of financial connections and there could be a
ripple value on the dollar. Any imbalances in the economy could have potential impact on the stability of the dollar and IT spending as well. Further, it is a negative sentiment for the financial sector,” said Ganesh Natarajan, former Nasscom chairman and CEO Zensar Technologies.

“West Asia accounts for mere 1-1.5% of exposure for Indian IT. So the revenue risk is only to that extent. However, the indirect impact could be more severe. Because European and US banks have direct exposure to West Asia, increasing default risk will turn this industry to be conservative in allocating capital and in their spendings, including IT spending,” said Alok Shende, principal analyst, Ascentius Consulting.

“US banks had recently started coming out to of their hibernation, and since US and European banking industry have a significant pie of Indian outsourcing industry, the risk aversion could slowdown the pace of outsourcing,” Mr Shende added. Mastek CMD Sudhakar Ram, however, said the impact was only a second or third order impact, it would not be very major. “As it is, companies were spending only on keeping the lights on. So they cannot cut back on that,” he said. But if indeed customers continue to spend only on keeping the lights on (or in other words, only absolutely necessary spends), then the much-awaited recovery that IT firms were anticipating may be delayed yet some more.

Tech companies find it difficult to crack deals in US, Europe

BANGALORE: For India’s top tech firms seeking to take an inorganic growth route for expanding in the US and European markets, successful acquisitions are becoming harder to come by, as potential targets demand high valuations and cultural barriers in several countries act as a bottleneck.

Over the past two years, tech firms including Wipro, Infosys, Patni and several others have had discussions with potential targets such as Globant of Argentina, Ciber in the US and IDS Scheer of Germany. While IDS Scheer was acquired by Software AG earlier this year, both Globant and Ciber decided to discontinue their dialogues with potential acquirers.

“It is not a surprise to me that we are an acquisition target as we do have a very unique model which makes us attractive, but also it is very difficult to acquire,” said Tony Hadzi, executive vice- president & president (custom solutions division) of Ciber. “However, we do not want to be acquired and not aiming to be acquired. We have solicitations, but we just turned them down.”

With around $1.2 billion in revenues, and customers such as American Express, AT&T, General Motors and Abott Laboratories, Ciber makes a very lucrative acquisition target for an Indian company seeking to establish a stronger US footprint.

“We did explore Ciber, but valuations apart from other issues did not help our efforts,” said an executive at an Indian tech firm involved with M&A initiatives. He requested anonymity because he is not authorised to discuss such transactions with media.

Meanwhile, smaller service providers in countries of Brazil, Argentina and Mexico, such as Globant, which counts Adidas, LinkedIn and Citi among its top customer, have also been approached by several Indian tech firms, including Patni. But, the dialogues could not conclude.

Globant, with around $100 million in revenues, can help an Indian tech firm gain near shore advantage and serve top US customers better. “We wanted to explore M&A opportunities with Globant, but the valuation being demanded was almost $400-500 million at $4,100 million revenues. We were not ready for a transaction at such premium,” said a senior executive at one of the tech firms, which had evaluated Globant for a potential acquisition.

In Germany, where Infosys, Wipro and several other Indian tech firms are pursuing acquisition targets, the companies are wary about offshoring of jobs. Experts such as Peter Schumacher of European strategy consulting firm Value Leadership say acquisitions are an emotional issue in Europe, which many Indian tech firm are not realising.

“European companies and employees are concerned that Indian companies will fire employees in Europe and shift work offshore,” he said. Citing an example he said NIIT’s acquisition of German services firm AD Solutions in 2002 provides some learning for Indian tech firms. “While they started with much enthusiasm, they failed to acquire any offshoring business during the following 12 months period. They also ran into significant integration problems, which they had completely underestimated,” Mr Schumacher added.

Within just 15 months the German unit saw its headcount drop 26% at significant cost. “With proper preparation, NIIT should have anticipated most of these problems prior to the acquisition,” he added.