Investment bankers and analysts project increased merger and acquisitions (M&A) activity in the information technology (IT) space where smaller Indian companies are acquired by larger foreign players but do not rule out a large deals either. The expectation is that these acquisitions will expand their presence in a new market and also to upgrade their technology and service capacity.
Starting with Oracle’s acquisition of i-flex, CAP Gemini’s acquisition of Kanbay, and EDS’s acquisition of Mphasis, many deals are also being worked out where the M&A activity happens both directions. Motivations for Indian companies include buying market share and achieve operation optimization. The Indian IT acquisition spread will be limited to smaller acquisitions because of the inherent risk to reward equations and the risk appetite for Indian IT companies is low and limited to verticals segments and new service lines in new geography or in cases to gain access to or protect strategic clients. A survey organized by The Indus Entrepreneurs (TiE) said that over 80% of the respondents reported plans to merge with a US or European company to build global relationship and leadership teams and capabilities expected to reach USD 10 billion in Europe alone. IT trend analysts warn that while Indian IT companies have had a successful run in the last 3-4 years, larger multi-national companies are getting into that space as also Eastern European nations with similar skill sets and cost metrics as India but also present significant opportunity and potential.
Apart from outright acquisitions experts project increased outsourcing activity by large and mid-level companies abroad who do not yet have a presence in India because of the decreased cost of operations and increased output. However, they say the expansion from outsourcing to Business Process Outsourcing (BPO) will take a couple of years to translate because most of such work is limited to call center operations.
The expansion into India is most visible in the London Stock Exchange (LSE) where 15 Indian and India-focused companies are seeking to raise capital in 2006 netting Rs. 20,000 crore (USD 4 billion) and providing investors an opportunity to invest in real estate and IT. The amount raised on the India-story is about 20% of the total USD 22 billion raised in the LSE. Real estate majors such as Unitech, Hiranandani Group, Raheja Group, and West Pioneer Properties have cornered about 50% of such capital. Investment bankers project that another 20 Indian companies are in line to raise Rs. 21,800 crore (USD 4.7 billion) in the coming months and include IT, media, and pharmaceutical companies. Indian companies are attracted to the LSE because of its flexible norms and easily-available funds.
The expansion in Indian companies is despite the high rate of corporate taxation in India and much higher than major economies like the US, UK, China, and Japan. According to a recent study by PricewaterhouseCoopers and the World Bank, Indian companies pay as much as 81% of corporate profits as taxes—which included corporate income tax, labor tax, and miscellaneous taxes. Among developing economies, Brazilian companies pay 71.7%, Russian companies pay 54.2%, and those in China 77.1%. In developed countries, US companies pay 46%, UK 35.4%, Germany 57.1%, and French 68.2%. Only 12 other nations have higher taxation than India which includes Argentina (116.8%), Burundi (286.7%), and Belarus (186.1%).
Indian Government’s direct taxation collection is much less compared to other nations and is primarily from larger publicly traded companies. Most Indian companies or workers do not pay direct taxes and instead pay value added tax on goods consumed. To sustain this degree of growth, India must reduce corporate taxes and introduce measures to collect deemed income taxes from those who own cell phones or vehicles. The policy of burdening the nation’s progress on public limited companies is clearly unattainable