At least nine such transactions have taken place over the past two decades, including three in the past 12 months, involving TCS, Infosys Ltd, HCL Technologies Ltd (HCLTech), Wipro Ltd and WNS. The recent spurt comes as growth across the Indian IT services sector slows and companies seek to expand into underpenetrated markets.

But the trend also raises a strategic question: are IT firms building capabilities for the artificial intelligence (AI) era, or simply buying growth?

“While AI is dotted all over the press release, the crucial aspects appear to be access to the Volkswagen Group ecosystem and exerting power over control points of the emerging AI value chain,” said Thomas Reuner, principal analyst at PAC. Porsche is part of the Volkswagen group.

This is not a first for TCS—or the industry.

TCS’s deal comes a little more than four months after Bengaluru-based Wipro ended a nearly six-year drought by bagging a $1 billion IT modernization contract spanning eight years from Singapore-based food processing major Olam Group, marking its first mega deal in nearly six years. As part of the broader engagement, the country’s fourth-largest IT services firm would acquire Mindsprint, Olam’s IT arm, for $375 million in an all-cash deal.

Wipro has used the model before. In September 2018, the company won its largest IT outsourcing contract to date, valued at $1.6 billion over 10 years, from Alight Solutions LLC, the former benefits administration and human-resources outsourcing business of Aon Plc. As part of the deal, Wipro acquired Alight’s IT arm for about $117 million.

TCS, too, has done this before, although almost two decades ago. In 2008, it acquired Citigroup Global Services for $505 million and won an IT outsourcing contract worth $2.5 billion over nine years from the financial institution. That year, WNS acquired Aviva’s technology arm for $228 million and won an IT deal worth $1 billion over eight years from the insurer.

Infosys Ltd has used a similar model, although its transactions have not always followed the same sequence. India's second-largest tech services firm is in the process of acquiring Australian IT firm Versent Group for more than $150 million (AUD 233.25 million).

Under the acquisition announced in August last year, Infosys will acquire a 75% stake in Versent, with the remaining 25% retained by its parent, Telstra Group Ltd, Australia’s largest telecom company. The Bengaluru-based IT outsourcer extended its IT modernization project with Telstra for an undisclosed amount a month before the acquisition was announced.

In June 2023, Infosys had signed a five-year, $454 million IT management deal with Denmark’s Danske Bank, which included taking over the bank’s 1,400-person India IT centre in September that year for about $9 million.

HCLTech, too, has used the strategy. In February 2016, the Noida-based firm bought Volvo Group’s external IT business for about $138 million and won a five-year contract valued at $1.8 billion to run Volvo’s IT infrastructure.

The common thread is a way to deepen existing client relationships while adding growth. Analysts say the model can help IT services firms buy growth by accessing underpenetrated markets, while giving clients' IT units a new lease of life.

The deals are emerging as organic growth has become harder to find.

Last year was among the slowest for Indian IT. TCS reported its first revenue decline since listing on the stock exchanges in 2004, while Wipro reported its third straight year of revenue decline. TCS and Wipro ended the year with revenue of $30.02 billion and $10.48 billion, down 0.5% and 0.3%, respectively, from a year earlier. Infosys and HCLTech reported revenue of $20.16 billion and $14.66 billion, up 4.6% and 6%, respectively.

Analysts say that backdrop makes client-asset acquisitions attractive: they can provide immediate scale, deepen access to an existing relationship and open up markets where an IT services company has limited penetration.

“These asset take-out deals show desperation to buy growth when there is a crisis or when growth has slowed for the overall sector,” said Amit Chandra, vice-president of HDFC Securities.

The deals can nevertheless make commercial sense for both sides.

“While this growth might come at a certain cost, most IT firms have ample cash to burn and these deals are a win-win for both. While IT firms get access to an underpenetrated market and an established client base, fledgling IT units of the client get a new lease of life,” Chandra added.

“TCS is effectively buying growth. Here the valuations were good and similar to that of Wipro-Olam and Telstra-Infosys. As part of many large deal constructs, IT services firms are paying upfront productivity-related pass throughs to clients and lapping up IT arms of those clients,” said Sushovon Nayak, lead IT analyst at Anand Rathi Institutional Equities.

Jas Bardia

Jas Bardia is a Bengaluru-based business journalist covering India’s information technology (IT) services sector and Global Capability Centres (GCCs). Known for his investigative depth and attention to detail, Jas has a knack for breaking stories on leadership shifts, high-stakes deals, and evolving industry trends long before they hit the mainstream. If the news is anything IT-related, chances are this author has broken it. Before joining Mint in November 2023, Jas honed his financial reporting skills at Bloomberg News in Mumbai, where he covered bonds and currencies following his graduation from the Asian College of Journalism. When he isn’t chasing his next exclusive, Jas is likely scouting the city’s newest culinary spots, cool events, or is immersed in the electric atmosphere of a Bengaluru FC match at the Sree Kanteerava Stadium. Jas has an eye for detail, an ear for history, and a weakness for a great cologne, and values a good conversation as much as a good lead. If you want to talk about your favourite war movie, funny drunk stories, or a supposed “scam”/wrongdoing in a company, get in touch with him at jas.bardia@livemint.com.