Just when you thought you'd had enough sensational news for April 1st, Esteban Herrera, who covers Energy and Utilities industries for HfS, shares his thoughts on Wipro's big acquisition today...
Today’s news that Wipro is acquiring SAIC’s Oil & Gas Technology practice for $150M appears to be another complementary addition by the Indian ITES industry’s most aggressive acquirer, provided it’s not a great April fool’s joke. In fact, the funny thing here is that SAIC, long positioned as a leader in this space, has a practice that is only worth $150M. Either SAIC has been excellent at marketing itself as a bigger presence than it was, or Wipro got a steal of a deal.
The motive for the purchase is not difficult to speculate: Upstream Oil & Gas is notoriously conservative and very challenging to penetrate as a new provider. Even if they outsourced their entire back office, that spend is a rounding error compared to their capital and operating budgets for pulling valuable stuff out of the ground and moving it to where their downstream friends can get it to you and me. In addition, Big Oil & Gas has been relatively slow in its embrace of offshore, in part, again, because the savings just aren’t a big enough percentage of the whole pie to get very excited about. Add to that a typically insular, homogeneous and long-tenured workforce and you get one of the toughest walls for offshore firms to climb.
SAIC’s long-term relationships with Tier 1 and mostly Tier 2 upstream Oil & Gas companies and predominantly Western presence, will give a balance and a good entry point to Wipro’s vertical. Wipro will have to work hard to reassure suspicious existing customers to avoid losing them through change of control clauses or non-renewals. The typical challenges of all acquisitions will still apply (culture, financial integration etc.). It is not clear how much of the SAIC portfolio is IT infrastructure business, but at that valuation, it cannot be huge, so we suspect there is more consulting capability and domain expertise than a contribution to Wipro’s effort to win India’s Big 3’s race to win in that space.
We doubt that SAIC customers will see much of a change, other than perhaps some more frequent visits from their friendly Wipro sales reps. Wipro’s customers will gain access to a lot of specialized expertise that may not have been there before.
SAIC employees will probably see the biggest changes, and this is something buyers need to look out for—the last thing you want is to be paying for a provider that spends his or her time looking for a new job or is otherwise distracted with M&A concerns. Wipro paid over USD $100,000 per employee in this transaction with no guarantee that most of them will stay (or that Wipro will want them). One has to wonder what would have happened if it had instead raised industry base salaries by USD $33k and gone out and recruited 1000-1500 industry pros. The customer base might not have come with the investment, but it certainly could have captured the best talent in the business and built a formidable, and perhaps more sustainable, Oil & Gas business.
Esteban Herrera (pictured here) is Chief Operating Officer for HfS Research, who overseas HfS' coverage of Energy and Utilities markets. You can read our new reports on the Oil and Gas and Utilities industries later this month