Why are IT majors such as Cognizant, Infosys, HCLTech taken over by companies providing engineering services?

IT majors are looking for engineering companies! IT companies are acquiring engineering services companies to expand their scope of competencies and compete with pure engineering services companies backed by well-financed private equity firms.

Cognizant recently made the largest acquisition in the engineering industry, purchasing US company Belcan for $1.3 billion. This marks Cognizant’s second engineering acquisition under the leadership of new CEO Ravi Kumar.

Increase

According to an ET report, other IT companies have also made significant acquisitions in the engineering services sector.

In April, Infosys made a significant acquisition, buying in-tech, a German company specializing in ER&D, for USD 480 million. The move was preceded by another significant acquisition in January, in which Infosys acquired InSemi, a semiconductor design and embedded services provider, for Rs 280 crore ($33 million).

Datawise

Last year, HCLTech acquired German automotive engineering company ASAP for $280 million. Accenture, Capgemini, Tech Mahindra, Coforge and smaller players such as Happiest Minds and Xorient have also made recent acquisitions in this space.

According to analysts, there is significant untapped potential for outsourcing in the engineering services sector.

Pareekh Jain, CEO, EIIRTrend, was quoted as saying, “Only 20% of the 5% of the total R&D spend goes to India. This number is expected to triple in the next ten years. “Engineering Services now appears to be where IT Services was 10-15 years ago IT companies are jumping on the bandwagon of rising R&D spending.”

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Jain also added that IT companies are aiming to offer end-to-end solutions as digital services have a significant engineering component. Without increasing their capabilities, IT companies risk losing engineering work to smaller engineering services companies that are currently growing faster than their larger counterparts.

Jain highlighted an additional reason contributing to the increase in M&A activity in the engineering sector. He said: “Recently, many PE firms have started investing in pure engineering firms. About 20 of them are currently backed by top PE firms. This has also increased the reluctance of IT service providers.”

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Private equity companies usually make investments with the intention of selling their shares after a certain period of time in order to generate higher profits. PE firms’ growing interest in engineering companies indicates the significant value and potential of this industry.

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