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Wipro (WPRO)
Technology
Acquires SAIC’s Global Oil and Gas (O&G) IT practice. Wipro has announced an allcash
acquisition of the O&G Global IT practice of Science Applications International
Corporation (SAIC) for a consideration of US$150 mn. Even as Wipro has a mixed past
record on acquisition, we see this acquisition as positive, prima facie, as it (1) enhances
Wipro’s presence and capabilities in the upstream O&G space, a large spender on
technology that is currently under-penetrated by offshore IT, and (2) provides Wipro an
entry into marquee O&G client base. Acquisition appears EPS accretive.
Acquisition details
Wipro has signed an agreement to acquire the Global O&G IT practice of SAIC in an all-cash deal
for a total consideration of US$150 mn. Key details of the business being acquired
SAIC’s Global O&G IT practice (SGIT, hereon) provides consulting, system integration and
outsourcing services to global oil majors with significant domain capabilities in the areas of
digital oil field, petro-technical data management and petroleum application services addressing
the upstream segment.
SGIT had revenues of US$188 mn for 12 months ending January 2011 with low double-digit
EBITDA margin. Wipro indicated that it expects SGIT’s margins to move closer to Wipro’s
current margins of ~25% over the next 24 months.
Even as Wipro did not share details on the net income of SGIT, it indicated that the deal is likely
to be EPS accretive – essentially implying a net margin upwards of 7%. Valuations at a little
over 0.8X price/sales or <12X price/earnings look reasonable.
SGIT’s client base includes large E&P companies in the O&G space. Wipro indicates that 6 of
SGIT’s top accounts are F/G-500 companies and only one overlap with Wipro. SGIT’s top-10
accounts contribute roughly 90% of its revenues.
1/3rd of SGIT’s 1,450-strong employee base is in India (Bangalore and Noida) with the rest
distributed across client geographies with US being the prominent one.
Wipro indicates Accenture as the leading player in SGIT’s business segments. Other competition
includes the likes of Schlumberger and Halliburton.
Wipro expects to close the deal in the next one to two months. There is no deferred
consideration in the deal.
The rationale – niche skills, large vertical, marquee clients, timing
Our discussions with Wipro suggest three key strategic imperatives driving the acquisition
Acquisition of niche skills – Wipro indicates that the offshore IT companies have not
been able to penetrate the upstream O&G segment meaningfully leveraging their core IT
skills. Clients in this vertical demand niche domain-specific skills, a gap Wipro intends to
fill through this acquisition.
Large vertical – Wipro indicated that it derives only about 20% of its O&G segment
revenues (which in turn are 1/3rd of Energy and Utilities vertical revenues) from upstream
companies – implying a current revenue base of roughly US$35-40 mn per annum from
upstream O&G. This acquisition takes Wipro’s E&U practice to north of US$700 mn and
the upstream O&G sub-vertical to US$200 mn+ per annum. As a comparison, the E&U
vertical is roughly US$380 mn in annual revenues for both Infosys and TCS.
Marquee clients – as mentioned earlier in the note, the acquisition gives Wipro access to
several large accounts, especially in the US geography, an area of relatively low presence
for Wipro. SGIT has six F/G-500 O&G majors in its client portfolio, of which only one is
common with Wipro. This is important, given that O&G, especially upstream, is a
concentrated vertical, like Telecom Service Providers. Leadership in such verticals demands
presence in large companies – this is what the acquisition provides Wipro. Wipro sees
good cross-sell opportunity in several of SGIT’s clients.
Timing – several industry reports indicate a surge of large deal renewals in the O&G
vertical in the near term. In addition, we also believe that companies in this space, who
have traditionally refrained from adopting the Global Delivery Model, are now looking at
exploring such options. It pays to be present at the right place at the right time, and
that’s part of Wipro’s bet here, we believe.
We also believe that this acquisition should be easier to integrate versus some of the other
acquisitions made by the Indian IT services, given that this is not consulting-dominated.
EPS impact – marginal
Exhibit 1 depicts the impact of the acquisition on Wipro’s EPS for FY2012E and FY2013E –
we expect the impact to be marginal.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro (WPRO)
Technology
Acquires SAIC’s Global Oil and Gas (O&G) IT practice. Wipro has announced an allcash
acquisition of the O&G Global IT practice of Science Applications International
Corporation (SAIC) for a consideration of US$150 mn. Even as Wipro has a mixed past
record on acquisition, we see this acquisition as positive, prima facie, as it (1) enhances
Wipro’s presence and capabilities in the upstream O&G space, a large spender on
technology that is currently under-penetrated by offshore IT, and (2) provides Wipro an
entry into marquee O&G client base. Acquisition appears EPS accretive.
Acquisition details
Wipro has signed an agreement to acquire the Global O&G IT practice of SAIC in an all-cash deal
for a total consideration of US$150 mn. Key details of the business being acquired
SAIC’s Global O&G IT practice (SGIT, hereon) provides consulting, system integration and
outsourcing services to global oil majors with significant domain capabilities in the areas of
digital oil field, petro-technical data management and petroleum application services addressing
the upstream segment.
SGIT had revenues of US$188 mn for 12 months ending January 2011 with low double-digit
EBITDA margin. Wipro indicated that it expects SGIT’s margins to move closer to Wipro’s
current margins of ~25% over the next 24 months.
Even as Wipro did not share details on the net income of SGIT, it indicated that the deal is likely
to be EPS accretive – essentially implying a net margin upwards of 7%. Valuations at a little
over 0.8X price/sales or <12X price/earnings look reasonable.
SGIT’s client base includes large E&P companies in the O&G space. Wipro indicates that 6 of
SGIT’s top accounts are F/G-500 companies and only one overlap with Wipro. SGIT’s top-10
accounts contribute roughly 90% of its revenues.
1/3rd of SGIT’s 1,450-strong employee base is in India (Bangalore and Noida) with the rest
distributed across client geographies with US being the prominent one.
Wipro indicates Accenture as the leading player in SGIT’s business segments. Other competition
includes the likes of Schlumberger and Halliburton.
Wipro expects to close the deal in the next one to two months. There is no deferred
consideration in the deal.
The rationale – niche skills, large vertical, marquee clients, timing
Our discussions with Wipro suggest three key strategic imperatives driving the acquisition
Acquisition of niche skills – Wipro indicates that the offshore IT companies have not
been able to penetrate the upstream O&G segment meaningfully leveraging their core IT
skills. Clients in this vertical demand niche domain-specific skills, a gap Wipro intends to
fill through this acquisition.
Large vertical – Wipro indicated that it derives only about 20% of its O&G segment
revenues (which in turn are 1/3rd of Energy and Utilities vertical revenues) from upstream
companies – implying a current revenue base of roughly US$35-40 mn per annum from
upstream O&G. This acquisition takes Wipro’s E&U practice to north of US$700 mn and
the upstream O&G sub-vertical to US$200 mn+ per annum. As a comparison, the E&U
vertical is roughly US$380 mn in annual revenues for both Infosys and TCS.
Marquee clients – as mentioned earlier in the note, the acquisition gives Wipro access to
several large accounts, especially in the US geography, an area of relatively low presence
for Wipro. SGIT has six F/G-500 O&G majors in its client portfolio, of which only one is
common with Wipro. This is important, given that O&G, especially upstream, is a
concentrated vertical, like Telecom Service Providers. Leadership in such verticals demands
presence in large companies – this is what the acquisition provides Wipro. Wipro sees
good cross-sell opportunity in several of SGIT’s clients.
Timing – several industry reports indicate a surge of large deal renewals in the O&G
vertical in the near term. In addition, we also believe that companies in this space, who
have traditionally refrained from adopting the Global Delivery Model, are now looking at
exploring such options. It pays to be present at the right place at the right time, and
that’s part of Wipro’s bet here, we believe.
We also believe that this acquisition should be easier to integrate versus some of the other
acquisitions made by the Indian IT services, given that this is not consulting-dominated.
EPS impact – marginal
Exhibit 1 depicts the impact of the acquisition on Wipro’s EPS for FY2012E and FY2013E –
we expect the impact to be marginal.
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