The tech industry has been thick with buyout rumors lately. So it’s probably not surprising that whispers started coming from the world of IT outsourcing.
On Sept. 15, India’s Financial Express reported that leading outsourcer Cognizant Technology Solutions (CTSH) was working toward a merger with Genpact (G), a major provider of back-office or business process outsourcing (BPO) services.
The report led to some wild buying and selling of Genpact’s stock, but it was not universally accepted as true. Cognizant also provides BPO services, but Genpact’s $1 billion in annual revenue would bring a major shift in focus. That wouldn’t make economic sense, say Cowen & Co. analysts.
Such a transaction would dilute EBIT margins, earnings and ROIC, essentially resulting in a destruction of shareholder value, a very atypical behavior for a company headed by a management team with a long history of conservative behavior,” the analysts wrote in a Sept. 21 note.
Poor Fit
Cognizant, like most companies, won’t comment on market rumors. But Malcolm Frank, the firm’s senior vice president for marketing and strategy, says such a deal wouldn’t fit Cognizant’s acquisition strategy.
“We will acquire for capability, but not for capacity,” Frank told IBD. “We’ll do an acquisition to build up an industry competency, or a service line or a geography. But in any of those three cases, we look for something smaller in size that (is) going to be catalytic for us in one of those markets.”
Cognizant’s recent buyouts have fit that description.
In May, the company bought London-based management consulting firm PIPC, adding just 200 employees to Cognizant’s count of more than 85,000. A month later it purchased another consulting firm, French IT testing specialist Galileo Performance.
As Frank is quick to point out, it’s not like Cognizant needs buyouts to grow. The company reported double-digit profit and sales growth every quarter throughout the recession and kept adding to its head count. Now that things are picking up, its growth is accelerating.
Second-quarter revenue jumped 42% from the year-earlier quarter to $1.1 billion, while earnings per share climbed 19% to 56 cents. Frank says the company has hired more than 10,000 people this year, which turned out to give it a crucial edge.
“Pretty well every one of the India-based IT vendors got a significant lift in the second quarter,” said Kaufman Bros. analyst Karl Keirstead. “The Indian firms haven’t hired fast enough to keep up with the volume surge that they’ve experienced. They’ve all admitted they did not anticipate the demand recovering the way it did.”
Source:http://www.investors.com/NewsAndAnalysis/Article.aspx?id=550393&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BusinessRss+%28Business+RSS%29
