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Wipro makes its biggest acquisition yet, buys Capco for $1.45 BN; Investors show a lukewarm response to the deal

The Indian companies are picking up speed, billionaire Azim Premji’s IT company Wipro has agreed to acquire London-based consultancy firm Capco for $1.45 billion in its biggest purchases yet.

The purchase will add 5000 consultants from Capco and will help Wipro to add banking, insurance, and financial services clients to its portfolio, giving it the much-needed boost and spur growth that has been lagging behind local rivals.

The transaction is expected to close in the quarter ending June 30; Wipro has been losing its edge against competitors like HCL Technologies Ltd and Infosys Ltd. The Azim Premji controlled company hired Thierry Delaporte from Capgemini SE to help it regain its edge.

Capco LLC / IT Dept. (@CapcoLLC) | Twitter

The purchase is said to benefit Wipro by adding 30 new clients; the solutions suite is designed to enhance Wipro’s existing BoundryLess Enterprise – Universal Edge Portfolio, and as part of the solution offering, Wipro is joining the IBM Edge ecosystem. 

However, while the investors have applauded Wipro’s bold move to acquire Capco, the movie hasn’t quite found the enthusiasm within the Investor circles.

Wipro's mantra: Acquire to grow | M&A Critique

Wipro makes a Bold Move but Lacks Investor Confidence.

As a company, Wipro has been one of the most active companies in terms of acquisitions in the Indian IT service providers; however, the problem is that Wipro, despite being so acquisitive, has very little to show in terms of benefits accrued from all its mergers and acquisition.

It has a growth rate that is still far behind its peers, and while the acquisition of Capco is one of the biggest yet, and an all-cash deal, 

  • But given the chequered history of past acquisitions, the investors aren’t too gung-ho about this latest move by Wipro.
  • Also, analysts and industry watchers were apprehensive since integrating a consultancy firm is not an easy route because the cost and culture structure is entirely different. 
  • Questions are also being raised at the timing of the acquisition and the expenditure when organic demand is already robust for the technology sector in the aftermath of the pandemic. 
  • Some analysts are also worried about the premium valuation paid for Capco, affecting the shares of Wipro, which were down about 3%. 
  • As per the analysts, the key lies in fact as to how well Wipro will execute and in value extraction. The concern regarding the same has been voiced, taking into account the track record of Wipro from previous acquisitions over the last two decades has been less than average.
  • Another concern is that Wipro has no been able to record industry matching growth in each of the last ten years, which has led to it slipping in revenue ranking within the industry.
  • In addition – to get a 15% return on capital employed, Wipro will need to strike 7-8 large deals with Capco’s 30 key clients, which implies a 25-30% success rate.
  • Banking and financial services account for 30% of Wipro’s revenues, and therefore while the acquisition in this space makes sense as it may help in creating cross-selling opportunities even across existing clients. However, the high cost of purchase and the usual challenge of integrating large acquisitions may hamper generating decent returns.

75 years of Wipro: Chairman Rishad shares throwback pic of father Azim  Premji | The News Minute

Wipro’s Journey

On December 29, 1945, Muhamed Hussain Hasham Premji registered Western India Vegetable Products Limited after buying an oil mill in Amalner, Maharashtra. Cut to today, 75 years later, Rishad Premji (his Grandson) has created his legacy on the software firm. 

The Capco acquisition s the largest to date in the history of Wipro, and despite getting a cold shoulder from the investors regarding the deal, if Wipro gets it right, it could very well catapult the company to a global technology consulting sweepstakes.

The Capco acquisition, a London headquartered The Capital Markets Company (CAPCO), is a management and technology consultancy firm that provides digital, consulting, and technology services to its clients in the banking and financial services space, which is also the biggest source of revenue for Indian IT companies.

Counted as one of the top IT firms, Wipro was losing its sheen, to restore it on the fast track, Wipro chose Thierry Delaporte as CEO last year, who is a Capgemini veteran and while he is still in Paris and took charge during the pandemic, he is yet to visit the Wipro headquarters in Bengaluru.

Although the distance has not stopped this new CEO from taking the necessary steps to help Wipro grow and come back to its revenue trajectory. 

FORMER CAPGEMINI COO THIERRY DELAPORTE APPOINTED AS WIPRO'S NEW MD, CEO  -Industry Global News24

In his last six months with the company, Delaporte has taken steps to shake off Wipro’s status as lacking and has been going after large deals, simplifying the organizational structure, and bringing in new leaders. 

Some f the significant deals under Dealporte include Metro AG, a billion-dollar deal, and another transformative deal with Telefonica.

One of the reasons for the deal with Capco is the long-standing friendship between Thierry Delaporte and Capco CEO – Lance Levy; this could definitely play a significant role in the smooth integration in the near future.

In a statement, Delaporte said when asked about offshoring firms’ struggle to build consulting practices in the past, “The world has changed. Consulting was too far away from the technology world. But digital has completely changed that”

Wipro might have been struggling in the recent past to make a mark, but the company has been at the forefront when it comes to making changes to its strategies to integrate the company’s growth and development. 

And while the recent Capco acquisition may not have generated much positive response from the investors, taking the track record of its current CEO, Wipro may just surprise many with a few tricks under its hat!

 

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