Indian IT companies continue overseas shopping spree

Silverline Technologies the latest buyer, snapping up a Hong Kong IT consultancy for $22 million.
Fuelled by funds from foreign listings, India’s flagship IT companies have been on the acquisition trail of late, buying up other software and infrastructure firms to expand their business and further cement Indian IT’s position on the global stage.

Silverline Technologies is the latest big spender, announcing its intention to buy Hong Kong-based Sky Capital International (SCI) in a $22 million all-cash deal. SCI is a privately held IT consultancy and long-time client of Silverline with a turnover of $24.3 million in 1999-2000.

Silverline Technologies is a provider of IT and outsourcing solutions with a focus on e-business, CRM, legacy transformation and application maintenance. It already has a presence in Hong Kong, as well as the US, UK, Canada and Egypt, but the company says the purchase of SCI is about expanding its customer base in the Far East, including Japan, as well as diversifying revenue streams.

“The acquisition of SCI is in line with Silverline’s strategy of becoming a truly global IT services company. Given Silverline’s long-standing relationship with SCI, we expect a rapid and seamless integration process,” says Shankar Iyer, Silverline president and CEO.

In August Silverline also agreed to pay as much as $12.5 million for a strategic 6% stake in US-based TIS Worldwide, a developer of e-commerce solutions, after postponing a decision to buy the whole company.

The latest Silverline deal follows last month’s acquisition of US company AlbionOrion by SSI, another leading Indian IT company specialising in education and training as well as software development and consultancy with a focus on the financial services industry.

“This … is a precursor to many such deals that help create an India MNC,” said Amit Chandra, executive vice president, Investment Banking & Corporate Strategy at DSP Merrill Lynch, when that deal was announced. “This will help SSI leapfrog and emerge as an IT powerhouse in a short period.”

The total consideration of $63.65 million, being settled by way of cash payment of $20 million and the balance through stock swap, makes it the largest acquisition by an Indian IT company to date. 

Although India’s IT sector is aiming for quick growth through acquisitions, the largest purchase so far this year has come from a much more traditional company. Tata Tea's take-over of Tetley Tea in the UK, valued at รบ315 million ($459 million), marked the single largest foreign acquisition ever carried out by an Indian company. But in terms of sheer numbers and interest from investors it is India’s software and information technology industry blazing the trail for other Indian companies.

Expand or die

Although economic reforms began in India in 1991, Indian companies have only recently begun to look at markets outside of the country for anything other than exports. Due to foreign exchange restrictions many companies had not previously focused on overseas expansion. But now that these restrictions have been eased extensively, Indian companies are looking at alliances and acquisitions, increasingly funded by listings on the London or New York bourses.

According to Prime Database, an Indian research publication, Indian companies raised more equity capital from the international markets in the financial year that ended 31 March than from the domestic market. Equity capital raised through international issues up to 31 March totaled Rs49.46 billion ($1.08 billion) compared to Rs29.75 billion raised from public issues of equity in the domestic market. And despite declining interest and more realistic expectations in the technology sector worldwide, Indian IT companies have continued to seek both the funds and better profile that comes from an overseas listing.

Infosys got the ball rolling when it became the first Indian company to list on the Nasdaq in March 1999, raising $61.2 million. Within months its share price had tripled. Infosys’ success is credited with generating much of the initial investor interest in the Indian IT sector. Next up was Satyam Infoway, which although not listed domestically in India, managed to raise $212.1 million on Nasdaq in October 1999.

Even though SSI has a partnership with Nasdaq in a joint venture called IndigoMarkets, which is developing the trading platform for Nasdaq’s operations in Japan and Europe, in March it chose to join the growing number of Indian companies listing in London. Its Global Depositary Receipt (GDR) issue raised $94.5 million to fund the company's growth strategy.

Silverline Technologies’ recent purchases come after it successfully listed American Depositary Receipts (ADRs) on the New York Stock Exchange in June. Aptech was the most recent overseas listing by an Indian IT company with its GDR issue on the London Stock Exchange in July raising $75 million. It seems that the money started burning a hole in the company’s pocket, because only three days after the GDR issue Aptech announced it was acquiring California-based Specsoft Consulting for a consideration of $10 million.

The next big blip on the radar screens of investors keen on Indian IT stocks, and software firms setting themselves up for a buyout, is Wipro - home to the world’s second richest man after Bill Gates, Chairman Azim Premji. The company has filed a registration statement with the Securities and Exchange Commission covering a proposed public offering of 2,750,000 ADRs. Credit Suisse First Boston, Morgan Stanley Dean Witter and Bank of America Securities will be the managing underwriters of the offering.

Wipro is India’s largest publicly traded IT company, and it was considered just a matter of time before it sought to tap into either the US or European market. Up until now it has been expanding its business mainly through strategic partnerships, most notably with Microsoft. But with the $202 million the company hopes to raise from its ADR issue it can well afford to join its compatriots in the bargain hunt for smaller, successful IT companies.

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