Internal scale drives TCS as rivals take acquisition route
IT giant Tata Consultancy Services (TCS) has steered away from acquisitions since 2013 with a strong emphasis on building internal scale. Chief Executive Officer (CEO) and Managing Director (MD) Rajesh Gopinathan has time and again reiterated the importance of skilling its workforce, but a spike in mergers and acquisitions (M&A) in the recent months, especially those led by global rival Accenture, has raised questions on TCS’s reticence.
“This orthodoxy of TCS contrasts with the behaviour of peers such as Accenture and Cognizant who have stepped up their acquisition activity a few notches over the past few years,” said JP Morgan in a report last month.
In the past three years, Accenture has spent $3.4 billion on M&As, of which around $1.7 billion were spent in 2017. Majority of the 70-odd acquisitions that the NYSElisted company made were focused on digital and cloud-related businesses. With a market cap of
$90 billion, TCS is inching behind Accenture, whose market cap stands at $100 billion.
The JP Morgan report said the investment community had now accepted TCS’ conservativeness and culture consciousness. Their last acquisition was French IT service provider Alti in 2013. Indian peers like HCL, Wipro and Tech Mahindra have remained active on the acquisitions front through the years.
According to analysts, the acquisitions are not entirely about gaining new customers but about buying newer capabilities and filling the white spaces in terms of technology offering, which TCS is building internally. “Today, acquisitions are more about bringing in a lot of talent in one go, as most of these companies have enough customers,” said Pareekh Jain, senior vice-president, HfS Research. He said unless any of the domestic IT firms made some major acquisitions, the difference in approach would not have an impact on the IT companies.
“Our investments in re-skilling the workforce in research and innovation, building intellectual property, products, and platforms are all resulting in good growth in our digital revenues, and that is showing in the numbers as well as in the deal flow,” Gopinathan had said.
Last year, TCS said around 250,000 employees had been skilled in newer technologies. Gopinathan maintains that the company’s internal capability and the flow of large deals will suffice to grow revenues organically.
Ashutosh Sharma, vice-president and research director, Forrester Research, said each of the IT services players had taken a different approach for growth. While some are bringing in design thinking like Tech Mahindra, HCL is focused on core delivery of infrastructure services. “TCS is keen on multi-million dollar transformative deals that go beyond the purview of just ‘digital’ or design thinking,” he said.
A report by CB insights last year said while Infosys had been actively investing in start-ups through their $500 million innovation fund, TCS had been pushing innovation completely in-house through nine innovation labs.
Equity analysts see a major impact of margin dilution when it comes to acquisitions. “TCS has an EBIT of around 25 per cent, compared to Accenture, which is at 14 per cent. So, the overall impact on margins is much lower for Accenture,” said Madhu Babu, Research analyst, Prabhudas Lilladher.
He said TCS had been highly focused on providing dividends and buyback opportunities, which had resulted in their current stance on acquisitions.