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October 11, 2012

IT Conference in Bangalore
Indian IT Companies: Profits Up, Enterprise Values Down

Last week in Bangalore, India, Marty Wolf served as the keynote speaker at a conference titled Cross-Border M&A: Capturing Value for Indian IT Firms. In his address, he advised the audience of prominent Indian IT industry leaders that India is at an inflection point regarding how to best capture enterprise value. 

Marty at Bangalore Forum
   Marty Wolf is pictured addressing conference participants in                Bangalore.


The event was reported in VCCircle, and the presentation can be found on our website.


The numbers tell the story during the past 12 months: 

  • Indian IT companies have increased sales while enterprise value (EV) and EBITDA have declined;
  • Indian Tier One IT companies have had sales growth of 25.76 percent and a profit increase of 16.53 percent, while EV/EBITDA has declined 12.48 percent; and;
  • Tier Two IT companies have increased sales 17.88 percent and profits 15.77 percent, with a 16.07 percent decline in EV/EBITDA.

The results underscore the fact that India's IT companies face mounting challenges as they compete for growth. The days of being able to sit "inside India" and serve the world through better, cheaper and faster services - as we have seen in the explosive growth in BPO in the past decade - are fading.  


The solution to new strategies for growth is evident in this simple statement: "What you do matters."  When we say "matters," we mean matters to the value of a company. Here are some results from the past 12 months that make our point:

  • BPO companies (voice) sold for 4.7x EBITDA;
  • Managed Services & Infrastructure Services companies were sold at 15.6x EBITDA, or 3.3 times more than BPO; and
  • Smaller, specialized vertical niche players like healthcare IT Services companies were sold at 11.7x EBITDA, versus 9.5x EBITDA for financial IT Services - both outpacing valuations of much larger BPO companies. Yet, healthcare is worth more right now.

Scale affects valuation as well. Offshore companies exceeding $500 million in sales garnered 10.8x EBITDA, versus 5.1x EBITDA for those with revenues less than $500 million. In addition, India's IT companies are facing seven threats:


First, the European debt crisis has negatively affected revenue, especially for the Tier One players for whom Europe represents a little over 25 percent of their customers.


Second, the Indian IPO market has almost come to a halt, with the number of IPOs dropping from 108 in 2010 to 11 in 2011 and just 10 through the first nine months of 2012.


Third, costs are going up with an increase in wages of more than 10 percent in the past two years.


Fourth, Indian IT companies lag behind their U.S. counterparts in investment in R&D. 


Fifth, India's GDP growth rate has been on a steady decline since 2010.


Sixth, the rupee to U.S. dollar exchange rate has been on the rise. 


Seventh, China is becoming a significant player in IT Services.


India's IT companies are being confronted with key strategic decisions about five key factors that drive enterprise value: 

  1. Size: The message is simple -- go big or go niche. If not, you risk becoming irrelevant to customers and vendors.
  2. Culture: Develop a culture of innovation to stay ahead of, or at least even, with competitors.
  3. Strategic relevancy:  Become more relevant to customers by going higher up on the value chain (as determined by gross margin).
  4. Diversified customers: Diversification of your customer base is essential.  Another crisis like the European debt crisis could be around the corner and you need a broad customer base to spread the risk.
  5. Look for change outside your walls:  M&A and strategic partnerships can bridge the gap between resources and capabilities. But cross-border deals take a lot of time and focus - buying or partnering with a company is a starting point, not a solution. Companies have to work hard at deals so they become the solution. 

As we have noted previously, what you do matters when it comes to creating value. And what is clear is many of India's IT companies must do something - or they will continue to work harder for less.


To learn more about martinwolf contact Matthew Putzulu at  

About martinwolf    


     San Ramon Office          
             San Francisco, CA                                                Bangalore, India

With offices in San Francisco and Bangalore, India, martinwolf is a leading middle market M&A Advisory focused on companies with services-based business models. Since 1997, our team has completed more than 115 transactions in six countries. We are a five-year member of the Merrill Lynch PS Referral Network, and were selected as ICICI Bank's (India's leading private bank) exclusive strategic partner for acquiring U.S. IT companies. martinwolf is a member of FINRA and SIPC. For more information, visit


June 15, 2012

glendonTodd Capital LLC announced that it acquired Aztec Systems, a leading provider of enterprise technology solutions to hundreds of U.S. middle-market companies. Aztec was represented by martinwolf in this transaction. Aztec, a member of Microsoft's Presidents Club, was recently ranked 27th in revenue on Bob Scott's 2012 Top 100 VARS list and serves more than 700 middle-market clients. Terms of the transaction were not disclosed. Please click here to view the announcement.


December 1, 2011

Softchoice Corporation (TSX: SO) announced it has it has fulfilled its regulatory requirements under the Competition Act and has now completed the acquisition of substantially all of the assets of UNIS LUMIN, one of Canada's most highly regarded Cisco networking and managed services companies. Softchoice was represented by martinwolf. The acquisition strengthens Softchoice's professional services capabilities while providing the technology foundation to support the Company's future cloud offerings.

Please click here to view the announcement.   


September 30, 2011

SPS, a leading Unified Communications Provider, announced that Court Square Partners has made an investment in the company. martinwolf advised SPS in this transaction. SPS is a premier unified communication services integrator, ranked 131 on the 2011 VAR 500 list with 2010 sales of $143 million. Court Square is a $4B+ New York-based PE Group, with more than 150 lifetime investments. Please click here to view the announcement. 


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