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IT service companies are buying niche firms to grow in emerging areas

BENGALURU: Wipro’s decision to acquire US-based International TechneGroup Incorporated (ITI) for $45 million earlier this month is not a one-off. More IT services companies are buying niche firms to grow in emerging areas such as engineering services. These companies are looking to scale up in high growth areas such as technology-led factories, internet of things (IoT) and software product engineering as their internal capabilities have often not worked, said analysts.

During the past two weeks, these companies have acquired five engineering services and digital technology focused firms, including Wipro’s acquisition of (ITI), Hexaware’s acquisition of Mobiquity for $182 million, and Cognizant buying Zenith Technologies for an undisclosed amount.

“Right now, the acquisitions provide both technical talent and customer base. These are in scarce supply and worth up to a 4-to-7x premium on revenues,” said con Valley-based Constellation Research.

While ITI should add value to Wipro’s digital engineering and manufacturing services, Mobiquity — which counts Amazon Web Services, Philips, Wawa, Backbase and Rabobank as clients — specialises in experience design and product engineering.

Engineering services has become one of the fastest growing segments for the large tech services companies, said Peter Bendor-Samuel, chief executive, Everest Group.

“The engineering services market is one of the most attractive segments of the services space…There is a great deal of interest in acquiring engineering services firms. Most of these firms (large IT companies) have had small practices, but have lacked the scale and depth of talent to become strategic partners in this fast growth market,” said Bendor-Samuel.

Engineering services exports stood at $24 billion in fiscal 2019, with over 1,500 engineering R&D companies employing over half a million people, according to data from industry lobby group Nasscom. Indian companies have more than 28% market share of the global ER&D space.

Tech services companies such as HCL Technologies, Tech Mahindra and others have bagged crucial deals in niche digital areas through such acquisitions. HCL Tech acquired Geometric and Butler Aerospace a couple of years ago for $285 million to drive growth in the engineering services business.

In fact, Tech Mahindra’s acquisition of Inter Informatics, a cabin design engineering firm in the Czech Republic last year may have helped in winning a multi-year aerospace engineering deal from Airbus, said Pareekh Jain, founder of Pareekh Consulting. “These small firms bring in niche skills in emerging areas of digital and engineering services. They also give access to a client base,” said Jain.

Source: Economic Times