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TCS : Acquiring capabilities through M&Asnews
Conventional wisdom sa
12 May 2006
The TCS think tank has devised an M&A strategy that helps expand capabilities rather than merely assets. By Rajiv Singh.

Conventional wisdom says when a company wants to expand its operations fast and is flush with funds, it should go on an acquisition spree. Tata Consultancy Services, however, believes in looking beyond the obvious and scripting its own unique solution.

N Chandrasekharan"We are not chasing revenues through M&As," says N Chandrasekharan, executive vice-president and head of global operations at TCS. "However, we do recognise that we need our acquisitions, alliances and partnerships, in order to leapfrog or dominate in a marketplace, as well as to bring in additional strategic capabilities." With this focused objective, the TCS think tank has devised an M&A strategy that would help it expand capabilities rather than merely assets.

The value of its six acquisitions, at under $100 million, amounts to less than 5 per cent of TCS's $2-billion-plus revenues. This bears out the fact that these M&As, though an integral part of the company's strategy, have not been critical to its growth. Each of the acquisitions has enhanced the company's skill and delivery capabilities, though their contribution to revenues has not yet been significant.

Strategic shopping
TCS's first M&A shopping expedition was restricted to the home market. Between 2001 and 2004, it acquired CMC, Airline Financial Support Services India (AFS), Aviation Software Development Consultancy India (ASDC) and Phoenix Global Solutions (India). The second half of 2005 was more hectic, with the merger of Group company Tata Infotech, the acquisition of Australian company FNS and the Chilean company Comicrom.

The FNS buyout last October, is perhaps a particularly significant addition. With 40 per cent of TCS's revenues coming from the banking, financial services and insurance sectors, this acquisition not only adds to the company's bouquet of solutions and services, but also comes at a critical point of time, when banks around the world are modernising and require next-generation systems. The FNS core banking package is robust, has proven scalability and an established global customer base, and TCS can now address the needs of international financial institutions more comprehensively.

Nudging the FNS announcement last October, came the news of TCS's 'structured deal' with the UK insurance major, the Pearl Group. The deal, which involves both the entities setting up a subsidiary with TCS as the majority partner, is not an M&A, but because of its considerable leveraging potential, it does add traction to the company's future mergers and acquisitions.

The ink had not yet dried on the Pearl deal when TCS made a strategic and dramatic move to enlarge its footprint in Latin America with the acquisition of the business process outsourcing Chilean company, Comicrom. The region has large banks and telecommunication companies but no effective services from a single provider. With TCS's existing assets in the region and Comicrom's own firm base in the banking and financial services sector, it is now uniquely positioned to service this market. The recent Tata Infotech merger supplements the capabilities of TCS in the areas of telecommunication and defence and opens up opportunities for cross selling.

Tata Consultancy Services

Portfolio
Business focused in five strategic areas of engineering services, infrastructure services, consulting, BPO and products; 160 offices in 34 countries; over 59,000 associates from 42 nationalities

M&As
November 2001: CMC, India
January 2004: AFS, India
March 2004: ASDC, India
July 2004: Phoenix Global Solutions, India
October 2005: FNS, Australia
October 2005: Pearl Group, UK (structured deal)
November 2005: Comicrom, Chile
February 2006: Tata Infotech, India

Value of acquisitions
FNS: $26 million
Comicrom: $23 million

Success begins at home
Strategic leverage was also what TCS was seeking when it went in for its first ever acquisition at home in 2001, taking a stake in the then government-owned domestic IT major and mega-solutions specialist, CMC. There were compelling reasons for acquiring CMC, says Chandrasekharan, or Chandra, as he is more popularly known, referring to the growth opportunities that were just opening up in India then.

Compared to its GDP, IT investment in India is still very low; Indian companies invest less than half of what their overseas counterparts do. This can only increase. Technologically, too, India is a challenge. Any system developed for use here - be it a solution for a stock exchange, rural banking, railways or ports - is more massive and complex, in terms of volume, performance requirements, user interfaces and network connectivity, than anywhere else in the world.

If something works in India, Chandra asserts, it will work anywhere else. This gives TCS a unique opportunity to hone skills and build capabilities that can be deployed elsewhere.

The gradual opening of the Indian market is also ushering in a host of MNCs. Apart from the opportunity of servicing their needs here, the MNCs provide opportunities for a reverse entry into their own home bases for IT companies.

Even as its other acquisitions, AFS, ASDC and Phoenix, consolidate the company's strengths in the travel and insurance sectors, the joining of hands with Tata Infotech consolidates synergies within the Group. The sister concerns are now in a position to cross-sell services to each other's clients and achieve better utilisation of resources. More importantly, there is now a clear and unified message in the marketplace.

As IT spend around the world rises and the size of the addressable pie gets larger, TCS's strategic and measured moves on the M&A front are adding muscle to its capabilities and strengthening its ability to seize new opportunities in the marketplace - at home and abroad.

Vision 2010
It is this very focused and steady growth that is propelling TCS towards its vision of being among the top 10 in the world by 2010. TCS is looking at a growth in exports from $17.2 billion to $60 billion and an increase in market share from about 12 per cent today to 17 per cent by 2010. The targets are ambitious, but TCS is confident about its ability to achieve them, whether through steady organic growth or via more strategic acquisitions.

There are challenges, of course. Integrating a multi-racial, multi-national workforce with the core values of the Tata Group is one of them. Adapting to new geographies, new cultures is another. In this process, TCS's years of experience in delivering projects globally is proving to be invaluable.

Managing director and chief executive officer S Ramadorai sums it up very well: "Having had a phenomenal experience in the global context since 1972, we have all the wherewithal to understand the markets. The best we can do is by running faster and that's what we are doing.


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TCS : Acquiring capabilities through M&As