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Though TCS traditionally lagged behind its peers in terms of M&A activities, it more than made up for the discrepancy in 2005 with a spate of acquisitions and strategic JVs

Though TCS has been the numero uno amongst Indian IT services players consistently for the last few years, somehow it seems that Infosys and Wipro have enjoyed greater mind-share. Even after TCS became public in 2004, Infy had remained the darling of the bourses. Other than lacking an aggressive PR overdrive, many believed that the absence of any kind of M&A activities has hampered in building the TCS brand.

Whatever be the merits of this argument, the scenario has definitely changed in 2005-not only did TCS went for a host of acquisitions, it also entered into a number of strategic alliances. Not only had these activities bolstered its topline and bottomline, it also had gone a long way in giving TCS a total image makeover. Even CEO S Ramadorai agrees that what started in 2005 would probably go a long way in helping TCS reach its stated goal of $10 bn by 2010. “It's not that inorganic way is the only route of growth for us; growing organically is still most crucial, but M&A is going to be an important activity for us in the future.”

Perhaps the merger of Tata Infotech into TCS bore the maximum significance during the year. For one, the move was seen by many to be the first step in consolidating all the Infotech companies in the Tata group. However, that would imply that both Tata Elxsi and Tata Technologies need to join the fold-a possibility that Ramadorai denies is likely in the near future. The merger provided TCS an expanded customer base and deeper penetration in key geographies. Tata Infotech had a significant presence in the systems integration area, particulary in telecom and defense, which has supplement capabilities of TCS as well as those of its subsidiary CMC, both in domestic and overseas markets.

Another significant aspect of TCS' inorganic strategy in 2005 was its re-entry into the BPO arena. Since selling off its stake in Intelenet to HDFC in 2004, TCS was conspicuous by its absence in this domain. On the other hand, its main competitors such as Infosys and Wipro as well as other major IT services players such as Satyam, HCL, and MphasiS had strong BPO arms to complement their software services business. However, even though TCS missed the BPO bus when compared to its peers, it fast made up through its acquisitions during the year. Coming within less than a month of the acquisition of UK-based Pearl Group's BPO division, TCS acquired Comicron in Chile.

In the first case, TCS paid £55 mn over four years for more than 75% stake in a subsidiary where Pearl Group holds the remaining stake. This company is providing life and pension BPO services to Pearl Group. The revenues of TCS's new subsidiary are estimated at £50 mn. Over 12 years, this business is expected to bring £486 mn from the Pearl Group. On the other hand, it paid around 0.65 times revenue for the 100% stake in Comicron, which though not expensive still means that TCS needs to improve operating margins from the current 14%. On the positive side, Comicron through its Chilean lineage and presence gave TCS, Spanish capabilities as well as strong Latin American presence as Comicron also catered to clients in neighboring countries.

According to Ramadorai, both acquisitions were in line with TCS' strategy of being in platform-based vertical BPOs. He believes that both acquisitions has allowed TCS to stay away from the low margin voiced-based BPO business. TCS's Indian BPO operations now cater to the BFSI, telecom, retail, travel and hospitality, and pharma verticals, but with employee strength of 2,000, it is much smaller than its peers. With 950 employees at Pearl Group and 1,257 employees in Comicron, its employee strength is slightly lower than Progeon's (Infosys) 4,700 employees. Wipro BPO is far ahead with 13,000 employees.

It was not that only the BPO acquisitions that were in the BFSI space, TCS also acquired Sydney-based core banking solution vendor FNS in October for $26 mn. From a strategic perspective, the FNS acquisition has helped TCS in its goal to be a complete solutions provider for the global banking industry. By this TCS is in the best position to take this product forward on its future roadmap and it will form the nucleus of TCS' core banking strategy for the global market.

Incidentally, TCS has successfully positioned the FNS solution in three of India's major banks as well as customized and implemented it at the State Bank of India in the world's largest core banking implementation. Even otherwise, FNS' Core Banking Solution has been installed in over 115 banks spread over 35 countries and its clients include tier I and tier II banks in emerging markets in Europe, Asia, Australia, and Africa.

The FNS acquisition gained significance when in November TCS formed a JV company with SBI called C-Edge Technologies with an authorized capital of Rs 40 crore. C-Edge is expected to play a key role in deploying FNS products in the role of a preferred systems integrator and leverage the experience both organizations have gained in the core-banking rollout in the State Bank group.

Though the JV with SBI for the BFSI space attracted more eyeballs, equally important was the arrangement TCS entered with Hindustan Aeronautics Limited (HAL), the country's premier global aircraft design and development company to provide cutting-edge engineering solutions for the global aerospace industry.

TCS has several years experience working with many aerospace companies like AVIO, Boeing, B/E Aerospace, EADS CIMPA, Dunlop Aerospace, GE Aircraft Engines, SME Aerospace, Goodrich, Pratt & Whitney, and others. HAL, on the other hand, works with Boeing, Airbus, Honeywell, BAE System, EADS, SNECMA group, Rolls Royce, and others.

Talking of JVs, the TCS report card for 2005 would remain incomplete without the mention of the software JVs it signed with Chinese firms in association with Microsoft to provide IT outsourcing services and solutions to both the global market and domestic market. China's Sino-India Cooperative Office selected both TCS and Microsoft as strategic partners. As part of this strategic partnership, TCS, Microsoft, and Beijing Zhongguancun Software Park Development, Uniware, and Tianjin Huayuan Software Park Construction and Development Co entered an alliance. The JV, to be located in Beijing's Zhongguancun Software Park, plans to start operation in early 2006. The JV is expected to provide IT outsourcing services and solutions to all major worldwide markets particularly US, Europe, and the Asia Pacific region including China's domestic market. The key objective of this global initiative is to build the new venture as a role model for the growing Chinese software industry. And it further bolsters TCS presence in perhaps the world's most important IT economy other than India and the US.

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