Cyient Ltd’s acquisition of Tao Digital Solutions Inc for $218 million, its largest, has put the spotlight on buyouts made by India’s mid-sized tech services companies with less than $2 billion in revenue, which experts suggest is aimed at addressing growth gaps.
Hyderabad-based Cyient, which ended last year with $658 million in revenue, announced its acquisition of Tao, an AI‑native data and product engineering solutions firm based in Santa Clara, on Saturday. The deal is expected to add $80 million to Cyient’s revenue, taking it to about $730 million.
Cyient is expected to pay about $130 million upfront for a complete transfer of shares. The remaining amount will be paid in two tranches across two years based on the profitability of the acquired entity.
“It helps us position ourselves for a larger market and for larger deals,” Sukamal Banerjee, chief executive officer of Cyient, said on a call with analysts on Monday. The acquisition is expected to increase Cyient’s market access.
“They (Tao) have the scale and they have the talent, which allows us to build new POD (product-oriented delivery) structures, new pyramids, which will bring in the concept of forward deployed engineering, AI driving the customer RoI (return on investment) in business cases,” Harjott Atrii, chief business officer of Cyient, said during the call.
Tao, which has about 3,500 employees, specializes in data, software product, cloud and AI-led services. The acquisition is expected to close by September, and all employees will be a part of Cyient, which will fund the acquisition party through cash and partly through debt.
Cyient reported a yearly increase of 0.8% in revenue last year. To be sure, the company’s revenue figures for the past two years were restated after the semiconductor business was carved out last year.
Boosting AI offerings
This purchase shifts the focus to at least five other mid-sized IT companies that have acquired assets over the past 12 months to boost their AI offerings and gain new market access and capabilities.
There are six listed IT services companies getting more than $2 billion in annual revenue and about 13 getting between $100 million and $2 billion in revenue. While the big four made their largest acquisitions last year, the smaller companies have not been behind.
“These acquisitions are driven by pressure on organic growth due to AI-led pricing pressure on traditional services like application development and maintenance, testing, and IMS (infrastructure management services),” said Karan Uppal, lead IT analyst for Phillip Capital. “Companies are trying to fill gaps wherever they can and are addressing white spaces in their IT service offerings. Strong cash flow generation over the last few years is also allowing many such acquisitions to take place.”
On 28 May, Persistent Systems Ltd announced the acquisition of Tallinn, Estonia-based IT firm Concise, for about $6 million. On Monday, the country’s ninth-largest IT services company, in a stock exchange filing, said this acquisition is expected to increase its presence in Eastern Europe. Concise ended last year with about $13 million in revenue and each of its 90 employees are expected to be a part of Persistent upon closure of the acquisition by July.
In July last year, Hexaware Technologies Ltd acquired Plano, Texas-based SMC Squared in an all-cash deal worth $120 million. The deal included a $45 million upfront payout, up to $45 million in earnouts, and up to $30 million as an outperformance bonus. This buyout will enable Hexaware to build and run back-end tech centres for clients.
In the same month, Firstsource Solutions Ltd announced the acquisition of Glasgow-based debt collection business Pastdue Credit Solutions for about $28 million.
In April last year, Sasken Technologies Ltd made its largest acquisition when it bought the software services unit of Borqs Technologies Inc for $40 million. Borqs specializes in software solutions for telecom companies. The company does not disclose business from industry segments but most of its growth last year came from this acquisition.
However, each of these acquisitions was eclipsed by Noida-based Coforge Ltd, seventh-largest Indian IT company, which announced its acquisition of Silicon Valley-based engineering firm, Encora, for $2.35 billion in December last year. This was Indian IT’s largest acquisition.
IT shopping bills
These acquisitions have taken the shopping bills of the country’s 15 largest IT services companies to $5 billion since April last year. Coforge, Persistent Systems, Hexaware, Firstsource and Sasken ended last year with $1.87 billion, $1.65 billion, $1.54 billion, $1.08 billion, and $126 million in revenue, up 29%, 17.4%, 7.6%, 14.6%, and 93%, respectively.
“All of these companies have identified certain opportunities for growth where they want to make their best bet. Cyient is engineering-focussed and is now focussing on data services because they see synergies there,” said Ashutosh Sharma, vice-president at Forrester Research.
For companies acquiring global capability centre consulting and engineering research and development firms, some of this activity has picked up because across the industry, traditional revenue sources are already under pressure as clients are asking them to do more with few, he said. This is prompting them to search for growth elsewhere.