Trouble if you do, trouble if you don't - this is largely the story of "big" acquisitions in Indian IT ::JPMorgan,

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 ‘Big’ acquisitions in Indian IT ordinarily have several objectives but there
are three most often articulated objectives: (a) introducing or raising growth
profile in a distinctive, altogether new function (vertical/horizontal/geography)
and (b) cross-synergizing with existing capabilities and selling into both
existing/acquisition-generated new clients to further boost acquirer’s organic
growth prospects and (c) achieving sufficient, scalable offshore flow-through
(or downstream) over time to breakeven on margins. (B) and (C) are typically
longer-term aims and much harder to realize as well.
 We find that most, if not all, large acquisitions fail tests (B) and/or (C).
High-profile acquisitions that have delivered below expectations in our view
include Info-crossing (acquired by Wipro in Aug-07 for USD 600 mn) and to a
lesser extent Axon (acquired by HCLT for USD 658 mn in Dec-08). Infocrossing
has not consolidated Wipro’s then existing leadership in inframanagement
(if anything TCS/HCLT have taken over leadership in inframanagement
in the last 2 years). Meanwhile, HCLT’s ability to leverage the
AXON acquisition to drive downstream at higher margins is doubtful (does not
meet objective (c)). Also, AXON has not helped HCLT grow enterprise
solutions (implementation of SAP/Oracle solutions) ahead of peers.
 Initial market reaction to significant acquisitions (during a defined time window
before/after the acquisition announcement) has generally been negative and in
most cases, rightly so. The market is especially skeptical of mergers between
companies especially of a company into a smaller/comparably sized one (e.g.
Patni-iGate or Tech Mahindra-Satyam). Tech Mahindra paid Rs ~59 per share
for stake in Satyam in April 2009. Two and half years later, the Satyam stock at
Rs 65 has returned ~11% (or annualized ~4% much below cost of equity and
very significantly below the IT index). From the time of announcement, the
economic break-even period for the investors (which includes cost of
equity) for significant mergers tends to be an extended one.
 We find that it could be a period of 12-18 months after the merger
announcement that value emerges for the investor. Investor interest in stocks
of companies involved in the merger emerges only at very reasonable valuations
when merger/acquisitions risks are more than adequately priced in. Such a point
may reach after a period of significant stock underperformance post the merger
announcement (e.g. Patni today is perceived by some investors as cheap).
 To sum up, we would temper buoyant expectations of significant acquisition(s).
The feel-good factor that prospect of a large acquisition sometimes induces may
be more psychological that does not square with the subsequent track record.
 TCS (OW) still our top pick in the sector. As per our detailed evaluation, in
recent memory, TCS’ e-Serve acquisition is the rare, significant big one in
Indian IT that has met all the three objectives. e-Serve now serves clients outside
Citigroup. In addition, e-Serve’s EBIT margins at 40%+ (FY11) is perhaps the
highest margins for the BPO sector (~ 2x Infosys’ BPO margins) (or 20% points
up from e-Serve’s margins of 20% at the time of acquisition). The consideration
value of 10x EBIT (on 2009) is now 3x EBIT (on 2011) signifying how much
TCS has extracted from this acquisition. In this report, we document TCS’
success at e-Serve as an exception among other case studies of relative failure.