Offshore IT Outsourcing Firms Moving Up the Value Chain

Over the last several months, offshore IT outsourcing firms have announced a series of acquisitions that are forming a pattern.  The acquired targets are small, highly strategic, and most notably, provide higher-end services. The high-end services these targets provide don’t typically command large multiyear contracts but they likely generate materially higher bill rates and gross margins.  Such deals are outlined below:

• Wipro acquired Designit, a European based digital and product design firm, for over 3.0x revenue
• Infosys acquired Kallidus (aka Skava), a California based provider of mobile website and applications for digital commerce, for a total consideration of $120 million
• MindTree acquired Bluefin Solutions, a European based SAP consultancy, for approximately $65 million of total consideration
• HCL Technologies acquired TrygTech, a Washington based software and hardware designer for mobile devices, kiosks, and network appliances

Opportunities to win new large multi-year outsourcing contracts are rare and competition is intense, resulting in unappealing gross margins.  We believe the deals above validate our proprietary market intelligence regarding offshore IT outsourcers expanding outside their traditional commoditized services.  These firms are interested in acquiring targets with unique service offerings targeting Fortune 500 companies, even if the target doesn’t have more than 3-6 months of revenue visibility – this was not the case 5 years ago. It is also important to note that while their acquisition strategy is morphing, their preferred deal structure remains the same – up front cash with a healthy amount of deferred retention and/or performance based contingent consideration.