Keane and Sonata

Last week NTT announced the acquisition of Keane. With roughly a billion dollars in revenue, this was a major acquisition, just a few months after their acquisition of Intelligroup, a $126 million IT Services company. Now, the ET reports that HCL and Ingram Micro are competing to acquire Sonata.

Earlier this year I was half complaining about why we weren’t seeing consolidation happening in the industry that is very fragmented. Well, that changed soon enough. This will only pick up speed from here on out. Investment bankers are going to quite busy for a year or two.

In a post about the reasons why companies will acquire in the Offshore industry I had laid out four key reasons (and discounted one). To summarize they were:

  1. Acquire Offshore Capability
  2. Market Footprint Expansion (Geo or Vertical)
  3. Capability Footprint Expansion (Service or Solution)
  4. Aggregate to Scale Up

NTT-Keane is actually about #4. NTT is aggregating offshore services companies to build a large offshore company which will have customer relationships through which they can sell other products and services. This is not an IBM-Daksh or an EDS-Mphasis type deal, which is what #1 is.

HCL-Sonata, if it were to happen would again be a Type 4 deal. It is interesting to speculate as to why small and mid-sized companies are open to selling right now. My hypothesis is that the recent recession shook them up. They realized that their companies didn’t have what it took to compete, when the market got competitive as it did when demand shrank. But they couldn’t have sold when valuations were low. Now that valuations are back, they see this as a good time to exit.

The future of the industry lies with the big and the innovative. The companies that are already in the big league are having a good time (except, for some reason, Wipro, at least this quarter.) Mid sized companies with low differentiation, will need to either acquire and bulk up themselves or hope that someone will acquire and rescue them.

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