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L&T Infotech mulls pre-IPO acquisitions

Bombay: Larsen and Toubro Ltd (L&T), India’s largest engineering firm, is ready to spend up to $1 billion to acquire its software services business as the subsidiary prepares for an initial public offering.

Buying companies will help L&T Infotech scale up and compete with larger rivals, R. Shankar Raman, chief financial officer of Mumbai-based Larsen, said in an interview. The company could spend between $100 million and $1 billion, he said, without elaborating.

Larsen, which lost a bid to buy Satyam Computer Services Ltd, the company at the center of India’s biggest corporate fraud, and local software makers are turning to acquisitions to boost revenue amid estimates that demand for their services will fall. Global spending on IT services is expected to decline 0.7% this year, mostly due to cuts by U.S. companies, researcher Gartner Inc. said April 9.

“Issuing the infotech business would help unlock value for the parent,” said Abhineet Anand, an analyst at Quant Broking Pvt., who values ​​the unit at around $1.5 billion-$2 billion. “They would list the unit once it reaches scale where it can fetch better valuations.”

While the listing will provide additional funds, L&T Infotech does not need to hold back on deals, Raman said, adding that the acquisition could also be funded by parent company Larsen, which has cash and cash equivalents of Rs. 11,200 crore ($1.77 billion).

Founded in 1938 by two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro, L&T was split into various business units and subsidiaries in 2011 as part of a reorganization aimed at boosting growth. L&T Infotech will be Larsen’s second listed entity after L&T Finance Holdings Ltd, its financial services arm, went public in 2011.

Larsen will not sell its information technology division, which Raman said has annual revenues of nearly $1 billion. It is the company’s third-largest unit by revenue.

“This is an area that we need to capture and develop,” Raman said at Bloomberg’s Mumbai office on May 13. “Listing Infotech would also be a currency of growth. It seems like a logical step for the company.”

L&T Finance shares up 24% from IPO price 52 per unit in August 2011, giving it a market capitalization of $1.7 billion. Larsen owns 72.9% of the company, according to data compiled by Bloomberg. Larsen shares rose 0.2% to 1,595.75 at 11:04 AM in Mumbai.

L&T Infotech, which employs 20,000 people, counts Chevron Corp., Hitachi Ltd and Lafarge SA among its clients, according to its website. The company acquired the Otis Elevator Co. unit in October last year for an undisclosed amount. Larsen lost a bid to acquire Satyam Computer Services to Tech Mahindra Ltd.

Infosys Ltd, India’s second-largest software exporter, said this month it plans to increase acquisitions and venture capital investment to boost sales to $20 billion by 2020. Bigger rival Tata Consultancy Services Ltd is eyeing possible acquisitions in Europe to expand its presence and may also consider adding businesses in the U.S., Chief Executive N. Chandrasekaran said in October. Bloomberg

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