IT services firms pursue ER&D acquisitions to enhance topline growth

IT services companies are acquiring ER&D (engineering and research and development) firms to boost their topline. In the last two months of the current fiscal, there have been about 11 such deals globally, including one by Infosys.

The trend of acquiring ER&D firms is happening at a time when IT companies are seeing a slowdown in their revenue growth — Indian tech sector revenue growth is expected to decline by more than half to 3.8% in FY24. In such a scenario, the ER&D space seems to be a perfect segment to tap to shore up revenues.

While last month, Infosys announced a definitive agreement to acquire InSemi, a leading semiconductor design and embedded services provider, for a total consideration of Rs 280 crore, this month, two IT firms (Xoriant and Ciklum) announced acquisitions in the same space.

Xoriant, a ChrysCapital-backed company, bought MapleLabs, a specialised product engineering firm serving Fortune 500 clients in the hi-tech industry. Xoriant is headed by Sukamal Banerjee, former corporate vice president and global leader of digital engineering business at HCLTech.

Banerjee’s former organisation HCLTech last year acquired a 100% equity stake in ASAP Group, a German automotive engineering services provider, to boost its capability in areas like autonomous driving, e-mobility and connectivity. HCLTech acquired the entire stake in cash, valuing the company at about $279.72 million (€ 251.1 million). Analysts expect that ASAP acquisition will help the IT major post a strong fourth quarter in fiscal 24.

Similarly, last September, Capgemini, which has about 180,000 employees in India, acquired HDL Design House, a leading independent provider of silicon design and verification services in Europe, to boost its semiconductor capabilities.

Pareekh Jain, founder at Pareekh Consulting, said, “Of the total annual ER&D spend of $1.8 trillion, only 5% ie $90 billion gets outsourced. This will grow to about $300 billion in the next three years. M&As gives three Cs to IT services companies – acquisition of clients, acquisition of industry and services capabilities and acquisition of geographical capabilities”.

M&As are not just limited to Indian IT companies, and according to Jain, there were about 70 mergers and acquisitions globally in 2023 in the IT engineering service space, including nine deals of global IT behemoth Accenture. Financial Express