Tarun GeorgeBANGALORE — Indian technology outsourcing firm Tech Mahindra Ltd. is looking for potential acquisitions in Latin America jointly with its software outsourcing unit Satyam Computer Services Ltd. in a bid to bolster the two companies’ foothold in the region and cater to global customers.
“We’re convinced that if we really want to move into the Latin American market in a stronger way, we need to make an acquisition there,” Vivek Kalra, Tech Mahindra’s vice president for Americas, told Dow Jones Newswires in a recent interview.
The Latin American market offers big business opportunities to many Indian outsourcing companies because the local economies there are experiencing strong growth and the region serves as a low-cost destination for developed markets.
The expansion plans at both companies come at a time when the country’s outsourcing industry is recovering from the effects of the economic slowdown triggered by a spurt in global technology spending.
Unlike its larger peers, Tech Mahindra, which caters almost exclusively to the telecom sector, has been recovering from the economic recession at a slower pace as service providers globally have been hit by a drop in consumer spending.
The size of the acquisitions will vary from $30 million to $40 million, and could cost up to $150 million to $200 million, Atul Kunwar, president of Satyam Computer said.
Mr. Kunwar said there are very few large outsourcing companies in the highly fragmented Latin American market.
The target companies, which would cater to local and global clients of both Tech Mahindra and Satyam Computer, offer services to more than one sector and have their own sales force to sell services, Mr. Kunwar said.
Mr. Kunwar expects more clarity on the deals by early next year, he said.
“We’ve got some names and we’ve talked to some of these (target) companies,” Kalra said. “It all depends on how the due diligence is going.”
Both executives declined to provide names of the target companies. As of Sept. 30, Tech Mahindra had cash and bank balances of 1.77 billion rupees [$38.4 million] and Satyam Computer had 25.27 billion rupees.
The companies are eyeing acquisitions in countries such as Mexico, Brazil, Argentina, Venezuela and Chile, Mr. Kalra said.
The joint acquisition efforts come at a time when the two companies are planning to integrate their businesses over the next year after Tech Mahindra bought a controlling 42.7% stake in Satyam Computer in April 2009.
Tech Mahindra, a joint venture of India’s Mahindra & Mahindra Ltd. and U.K.-based BT GroupPLC, bought the stake in Satyam after its founder and then chairman B. Ramalinga Raju confessed to overstating profit for years, using a fictitious cash balance of more than $1 billion.
Tech Mahindra is also planning to set up a development center in the U.S. in the next financial year beginning April to cater to North American clients of both Tech Mahindra and Satyam Computer, Mr. Kalra said.
“Most of the telecommunications customers are looking at some kind of a local element coming in,” he said. The company’s major clients in the U.S. include AT&T Inc. and Cisco Systems Inc.
It may either set up the center on its own or buy a smaller company in the region, Kalra said, without elaborating. The company has identified six U.S. cities as prospective locations for the center.
Mr. Kalra said the Pune-based company’s clients in the U.S. are now committing to two-three year long contracts worth $30 million to $100 million but willing to spend on the deals only on a quarterly basis based on achieving certain milestones.
This is mainly due to the dynamic nature of telecom technology and the changing focus of customers, he said.
With the U.S. witnessing an economic recovery, albeit at a slower pace, the company is also getting billing rate increases on most contracts coming up for renewals, Mr. Kalra said.
“We’ve had a couple of contracts where we’ve done rate increases of up to 6%-7%,” he said. The rate increases would be reflected in Tech Mahindra’s results in “one or two quarters from now,” he said.
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