Wipro Technologies, a unit of parent Wipro (NYSE: WIT ) , has signed an agreement to acquire the global oil and gas information technology business unit of SAIC (NYSE: SAI ) to strengthen its energy business. The deal will be an all-cash deal worth $150 million. The question is: How significant is it for investors?
Here's the deal
Wipro already faces stiff competition from rivals Accenture (NYSE: ACN ) , Cognizant (Nasdaq: CTSH ) , and India's Tata Consultancy Services in the high-profile consulting business. Partly in thanks to the fierce competition therein, the company has had little success in the segment and it currently contributes only about 2.9% to Wipro's total revenues. Cognizant, on the other hand, earns about 10% to 12% from its standalone consulting business. In a quest for new vertical markets that it can develop a stronger presence in -- and looking to match growth of its key competitors -- Wipro is moving forward with a bold acquisition plan.
Wipro's oil ambitions
With SAIC's significant domain capabilities in the areas of digital oil field, petro-technical data management, and petroleum application services, Wipro gets a chance to cater to the upstream segment as well and grab a share of the $19 billon U.S. market for upstream information technology solutions. Oil companies investing in the upstream business must also invest in associated IT services, and that's where Wipro comes in. Wipro's upstream IT business will now contribute an expected 17.5% to its energy, natural resources, and utilities business revenues, up from just 5% previously.
Fortunately, this type of work isn't entire unfamiliar to Wipro. In fact, the company has extensive experience in implementing solutions on the Microsoft platform for the larger energy and utilities industry.
A new market in a new market
Wipro has a comparatively low exposure to the U.S. market, with 55.9% of total business revenue coming from there. That's in contrast to Infosys (Nasdaq: INFY ) and Cognizant, which generate 65.8% and 77.7% of their revenues from these markets, respectively. An acquisition of SAIC's oil and gas technology unit will help Wipro to enhance its exposure to U.S. markets. The greater Foolish question: Why was SAIC interested in selling this business asset?
What does SAIC have to say?
SAIC says the sale of this asset is in sync with its plans to better focus on strategic growth areas. This includes energy segments such as smart grid, renewable energy implementation, and energy efficiency. The company feels investments in oil and gas IT services business would have diverted from its area of focus.
What do Fools say?
Wipro has been quite aggressive in making acquisitions to grow its business. Better yet, a return to higher IT spending and an improvement in the U.S. economy should trigger improved economics for the company in months and years to come. However, on the flip side, the company still trades for 21 times earnings, so growth will have to continue at a high rate if the company wants justify a higher multiple than established IT brands like IBM or Accenture.
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