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August 20, 2007

Why did Wipro buy Infocrossing?

The $600 million buyout of the US IT services firm is the biggest acquisition by an IT firm by a long shot and very different from Wipro's earlier "tuck in" or "string of pearls" acquisitions.

Businessworld proposes that the deal is aimed at pre-empting problems relating to data migration.
Infocrossing’s revenues during the last fiscal were $232.4 million, while its net profits stood at $9.3 million. Wipro’s all-cash buyout is equivalent to 2.5 times Infocrossing’s revenues and 64 times its earnings.

The buy is significant as it comes at a time when American clients demand more control over customer information and software they share with Indian outsourcing firms. Many US firms even want their data to reside in the country, and a new legislation to enforce this is currently being debated in Washington.

Through Infocrossing, Wipro hopes to pre-empt the growing data migration problem plaguing the offshore outsourcing industry.

Economic Times has an interview with Wipro IT Services CFO K R Lakshminarayana about Wipro's M&A strategy.

We follow a three-fit mechanism while acquiring companies - strategic fit, cultural fit and financial fit in that order. Under strategic fit, we figure out where does the new asset fall and how will it add value to the overall roadmap.

The cultural fit focuses on the issues pertaining to the post-acquisition amalgamation of the business within the existing Wipro framework. Pricing, which falls under the financial fit, is not considered on a short-term basis, but it’s rather a long-term factor. So, when we acquired Spectramind in ’02 for close to $100 million, we valued it at two times its sales, higher than what the market was expecting then. But strategically, it helped us leapfrog ahead of our peers.

...So far, our acquisitions span various regions in Europe and the US. Some of our targets include Finland-based Saraware, Austria-based NewLogic and Enabler from Portugal. All these companies are based in small towns with a strong element of local culture. But over a period of time, we have succeeded in weaving these companies into the Wipro framework. Two years ago, we were circumspect, but having concluded these acquisitions, we feel better about it now. Currently, we are looking for targets in Germany and France on a priority basis.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.