HP's EDS deal to spark M&A in Indian services sector

By Sumeet Chatterjee

BANGALORE (Reuters) - Hewlett-Packard Co's deal to buy Electronic Data Systems Corp is expected to spark a round of consolidation in the Indian technology outsourcing sector, as suddenly much-smaller rivals scramble to stay competitive.

Analysts say Infosys Technologies Ltd, Tata Consultancy Services Ltd, Wipro Ltd and Cognizant Technology Solutions Corp may now be forced to look for acquisitions to compete with a combined HP and EDS, and boost flagging profit growth.

"Businesses of companies like Infosys and Wipro are under pressure, as their rivals like International Business Machines Corp and Accenture Ltd have really learnt how to be competitive even in a sluggish economy," said Avinash Vashistha, CEO of outsourcing consultancy Tholons.

"This merger, if it happens, will only make (the) situation worse for them by potentially creating a third competitor," he said. "Now, it has become imperative for them to make acquisitions to fill the gap in their services portfolio and get a global footprint. If they don't go for inorganic growth at this stage, they will clearly be at a competitive disadvantage."

HP struck a deal to buy EDS for about $12.6 billion, which would vault it to second place, behind International Business Machines Corp, in technology services -- a sector that offers relatively stable income and high margins even in an economic downturn.

EDS has some 27,000 workers in India after buying 62 percent of MphasiS, a mid-sized Bangalore-based IT outsourcing company, in 2006. Prior to that EDS only had 3,000 workers in India.

Together HP and EDS would have roughly $39.4 billion in services revenue, compared with IBM's $54.1 billion last year.

"Scale helps keep costs in line and they could be good for customers. With such a large services organisation, the smaller customers might fall through the cracks and get lost," said Chad Hersh, analyst at technology research firm Novarica.