Analytics, AI/ML, cloud will drive cross-border M&A in enterprise tech: Amit Singh, Avendus Capital

Analytics, AI/ML, cloud will drive cross-border M&A in enterprise tech: Amit Singh, Avendus Capital
Amit Singh, executive director and co-head, enterprise technology & services investment banking, Avendus Capital.

While the COVID-19 pandemic wreaked havoc on most businesses across the world, enterprise technology companies came out winners, on the back of swelling demand for digitisation across sectors. Alongside their global peers, several of India’s leading information technology (IT) services firms took to acquisitions, large and small, over the past 12-odd months to buy new capabilities and beef up their presence in lucrative markets. 

Notable among recent such acquisitions is Wipro’s $1.45 billion all-cash deal to buy London based Capco. Peers Infosys, HCL, Cognizant, and Tech Mahindra have all made asset acquisitions in global markets in the past year. 

In an interview with TechCircle, Amit Singh, executive director and co-head of enterprise technology and services investment banking at Avendus Capital, spoke about how the pandemic has changed the mergers and acquisitions (M&A) landscape and why cross border acquisitions are here to stay.  


Enterprise IT is one of Mumbai based Avenues’ earliest practices. It advises companies on investments, mergers and acquisitions in the $50-$250 million ticket size range. 

Edited excerpts: 

How did the IT services industry remain upbeat about the M&A outlook through the pandemic? 


Tech and outsourcing are COVID-19 positive industries -- they have benefited from the pandemic.  

The reasons are on multiple dimensions. One, companies have been talking about going digital and taking up digital transformation for at least a couple of years now. But it was still largely a preserve of the CIO’s office, the CTO’s office, or some of the more eclectic or more thoughtful CEOs. Today, because everyone went into a shutdown mode, whether it is your customers or your supplier, the entire business ecosystem was disrupted. People realised that the only way to connect back was by going digital. So, what was being done in pockets or without institutional force has now become the sole agenda of every board of any substance globally.  

Second, there are certain elements of cost associated with outsourcing. One of the biggest expenditures is visa and travel cost. That has now been curtailed. As a result, there is cost saving.  


Rental is another big cost element that has been cut to some extent, along with all the infrastructure cost around electricity and generators. Some of it will come back, but the general rule of thumb thinking right now is at least 30% of the work can easily be done remotely. That model has been proven now. In IT, almost 95% of the employees moved to work from home in a jiffy. So, if you're an IT company or a BPO company, going forward, you could get 30% or more work done remotely. So, that is a substantial amount of cost saving. 

The third point is that there were several naysayers in the offshoring and outsourcing story. But now with people working from home, the whole rationale for not embracing offshoring and outsourcing has gone away. I think that barriers to acceptance have come down, and that is a positive for the industry.  

Given the whole world seem to have gone into a recession, the predominant view is that the US will be the engine that is going to pull the world out of it. The changes of the US dollar strengthening in the days to come, especially against INR, is a reasonable possibility, which is again generally good news for offshoring companies.  


To what extent did the pandemic affect your deal projections for IT services firms?  

Interestingly, nothing much changed except for Q1 when there was bit of an uncertainty. In Q2, IT companies went around the world with cheque books, hoping to get cheaper deals. By Q2, they have realized valuations are not getting cheaper, in fact they are going to become higher. It became obvious to everybody that this is a sector benefiting from huge tailwinds because of COVID-19. So they went head and executed on their M&A plans.  

Even the likes of Infosys, which is generally a little bit more circumspect with their M&A thesis, has done acquisitions in the cloud space and made several overseas acquisitions in a COVID-19 year. Wipro has done its largest deal in their history.  


It’s not that they were getting these at a discount price. We thought technology competency acquisition will be a key theme in 2020. Large consolidation deals have also happened during this period which was something that we did not really anticipate but whenever there is a general downturn or fear of the unknown, then there is a flight to safety of capital and outsourcing is quite a stable sector from a safety standpoint. This is a sector that continues to grow, and you cannot really go wrong with a BPO acquisition. 

Do you think the pandemic spurred M&A for IT services companies? 

Yes and no. Companies had obviously taken a decision by 2019 itself that there are competencies and gaps that they need to plug. Most outsourcing companies are pretty cash rich, so they don't have dearth of cash availability to go to shopping. Initial thinking was that maybe the pandemic will drop the prices and it would be a good time for deals. But they realize that the valuations have held, they also did not hold back. The worst thing that can happen in a bullish run is your growth lags behind others. There is such a tremendous amount of budget being allocated for digital transformation, the fear of missing out is extremely high, so companies will spend and plug gaps and acquire competencies without necessarily worrying too much about the tickets or the valuations. 


How have valuations held up in the enterprise technology space? 

From an outsourcing standpoint, tech companies, big or small, generally make money. They don't suffer from this “we will run out of cash syndrome”. The buyer knows that whether they do the deal or not, the company is going to survive and if they are able to show a spectacular growth in 2020, the same company will be valued much more in 2021. In venture capital and seed stages, the risk of companies going under was extremely high, especially if the business model was not fully established or if was not cash positive at that juncture.  

Obviously, you don't want to put good cash behind bad money that you have already invested in somewhere. 

So, firms were a lot more circumspect on those situations whereas on the enterprise services side, it was just a no brainer. Companies could see the visibility of growth for the next three, four or five years and hence, valuations increased in fact. 

What factors are driving Indian firms towards cross-border acquisitions? 

A rule of thumb in the outsourcing world is that it is more profitable to serve the global 2000 or the emerging companies, rather than trying to serve the SME. That has really been the mantra for most large companies or even mid-sized tech services companies. They all have built themselves around servicing global 2000 plus type of companies. Now, most of them, obviously reside in the Western world. There is a certain barrier to entry as far as getting access to Chinese companies. So, you keep them out. If you are doing M&A, you basically want to acquire those companies that also serve the global 2000 and they are more likely to be overseas.  

The second reason for foreign acquisitions is that some of the cutting edge, leading edge is not necessarily happening in India, it is happening overseas.  

The third is, given that there is a there is a consulting nature to the business and the business itself is transforming, it is very important to understanding the culture of the clients to be able to provide the right kind of solution. Sitting here in India and trying to figure out how a banking customer will behave in the days to come in the US, is way more difficult to fathom than to postulate how it would look like if you are based in the US. So this cultural context requires a local onsite presence.  

These three factors become very critical for driving overseas M&A. 

How did the whole digital transformation ecosystem change over the last couple of years? 

Digital means different things to different people. The biggest fear of most Fortune 500 companies is not that they are going to lose their bread and butter to a traditional competitor, but to a technology company. There have been enough and more such evidence and more are emerging day in and day out. Tech spend is much higher for tech firms than that of traditional fortune 500 companies, so the latter have no option but to spend on technology to play catch up.  

And, that is really the digital transformation we are talking about.  

They will have to start thinking like a tech company which in some sense is sort of a DNA change. In such a scenarios, companies that drive digital transformation will be in demand because they are at the top of the food chain in terms of ideating or reimagining how the future would look like, and then building the IT infrastructure to support it. They don't leave where a McKinsey would walk away, they basically take it down to the software product level. 

Apart from digital transformation, what else is driving the M&A and investment strategies for large IT services companies? 

Besides digital, there are pockets of competency gathering. It varies from company to company. For example, areas like analytics, engineering R&D, customer experience management, migration to cloud system, system integration of new generation cloud based applications, I feel these are slightly more traditional way of looking at the problem and that will continue. The barrier to entry is being broken down, it is difficult to create or protect an exclusive club. Competition is emerging from areas that you thought were not feasible for you and you have to build competencies in areas that you did not have in the past. Service providers are looking at this entire canvas from multiple angles and trying to build competencies both organically and organically to tackle this. 

What is your outlook for the next 12 months? 

We expect 2021 to be a fantastic year from an M&A standpoint. We are seeing a lot of deal momentum. The fear of missing out is extremely high among the buyers. There is a lot of pressure by boards as well as investors to generate higher return on capital by utilizing the cash sitting on the books. So these factors will drive M&A. But the areas are largely still the same such as analytics, AI, ML, cloud, user experience, engineering R&D, consulting-led transformation, digital payments.

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