Product software firms on acquisition spree in India

Indian product software development companies, specializing in electronic consumer goods like mobile handsets, audio-video devices and washing machines that are marketed by global firms, are on an acquisition spree, reported DNA daily.

The companies are buying up the captive outsourcing outfits of MNCs and other players who set up shop in India to benefit from its low-cost advantage.

Industry sources say that there have been at least 10-15 instances of such acquisitions in Bangalore alone, apart from several scores more in Pune and Hyderabad over the past few months.

Interestingly, most of these acquisitions have involved no cash outgo from the acquirer, while there is a commitment for outsourcing at least 50 percent of the current work over considerable period of time to the new company.

Over the past six months, MindTree alone has carried out 4-5 such deals, while another Bangalore-based outsourced product development company Symphony Services, has three such deals struck during the same period.

"The market has been brutal on these captives and most of these acquisitions happened during January-February. We expect another round in March-April," S Janakiraman, president and CEO, R&D Services, MindTree said.

"Many companies that have set up captives are finding it hard to manage such sub-scale operations thanks to the slowdown and are looking for opportunities to transfer them to companies like ours with three-year outsourcing contracts," said Amitava Roy, president, Symphony Services.

Another trend emerging from the current slowdown is that pricing models are undergoing a change with more product software outsourcing deals involving royalty payments on the IP generated by the Indian product outsourcing companies.

"The royalty model is taking off. While earlier it was not even considered, we are seeing that at least 5 percent of the current deals are based on royalty plus pricing basis," Janakiraman added stating there have been five such deals in the recent past while 6-8 are in the pipeline.