Debt's the way for Indian IT acquisition funding

BENGALURU: Persistent Systems' $1.5-billion bridge financing from Barclays for its proposed acquisition of German IT firm Nagarro is the latest sign that Indian IT companies are increasingly comfortable using debt to fund transformative acquisitions.

This marks a departure from the industry's long-standing preference for cash-rich, debt-free balance sheets.The financing, backed by a corporate guarantee of up to $1.7 billion from Persistent, reflects a broader shift in capital allocation as IT firms race to build AI capabilities, expand geographically and acquire specialised talent at a time when organic growth is slowing in the industry.The trend has been gathering pace. Earlier this year, Coforge secured a $550-million, three-year term loan from JPMorgan, Bank of America and HSBC to finance its $2.3-billion acquisition of Encora.

Last year, Cognizant funded part of its $1.3-billion acquisition of Belcan through a mix of cash and debt and also borrowed to finance a $1-billion share buyback-an unusual move in an industry that has traditionally relied on internal cash generation.Persistent said debt was the most efficient financing route. "Before this acquisition, we had roughly $300 million in cash and zero debt," Persistent CEO Sandeep Kalra said.

"We also received significant inbound interest from private equity firms on the asset side without requiring equity dilution. We had multiple financing options, including raising equity through a QIP, but we believe our equity is valuable and did not want to dilute shareholders.

" Kalra said the acquisition is expected to be 5%-6% earnings per share (EPS) accretive in the first year, excluding one-time costs, even after factoring in the cost of debt.Industry experts, however, say the financing reflects a deeper structural shift underway in global IT services."Companies that were once reluctant to draw down their cash reserves are now willing to raise debt because they believe acquisitions will deliver greater relevance and sustainable long-term growth," said Ramkumar Ramamoorthy, partner at Catalincs.Former Infosys CFO Mohandas Pai said acquisitions are increasingly becoming a strategic necessity as AI reshapes the technology services landscape.

"Many smaller IT companies are attempting large acquisitions, sometimes beyond what their balance sheets would ordinarily support, in the hope of accelerating growth, expanding revenues and gaining scale," Pai said.Pai cautioned that taking on substantial debt simply to boost revenues by 40%-50% over a short period carries considerable risk. Some companies, he said, appear to believe their valuation multiples can be sustained by becoming larger through acquisitions. However, higher leverage could eventually weigh on valuations if the expected growth fails to materialise."The firms that succeed will be the ones that use their balance sheets to buy relevance, not just revenue," said Phil Fersht, CEO of US IT advisory firm HFS Research.