TCS does a u-turn, restarts talks to buy Perot IT business from Dell

BENGALURU/MUMBAI: Tata Consultancy Services, which ended initial talks with Dell for its Perot IT business after a disagreement over price, is back at the table and is locked in a bidding war with rivals such as US-based Cognizant, three people familiar with the negotiations said.

"TCS left when the asking price was too high. But over past two weeks there has been more movement on price from Dell. They still have not agreed on a price," said one of the people with direct knowledge of the talks.

"They (TCS and Perot) are several hundred million dollars apart and there are questions about which contracts will be transferred. This is far from done," said the people with direct knowledge of the talks.

All the individuals requested anonymity as the discussions are confidential. The race to buy Perot, for which Dell has put a price tag of almost $5 billion, comes at a time India's $146-billion IT industry faces slowing revenue growth as top clients cut back spending on technology or take up software projects in-house.

If TCS or Cognizant manages to buy Perot, it would change the pecking order in the IT services landscape.

Dell has received bids from at least three companies — TCS, Cognizant and France-based Atos SE —and is finding it tough to get the price it wants, given that the value of the Perot business has depreciated over the years amid largescale technology shifts, executives familiar with the discussions said. Dell bought Perot for $3.9 billion in 2009.

"The challenge is that Perot's business is worth less than what Dell paid," said Ray Wang, founder of enterprise research firm Constellation Research.

"Perot's IT services business failed because many of the core team did not stay at Dell and, more importantly, many of the contracts were underbid prior to the acquisition to raise the value."

Dell said it does not comment on market rumours or speculation. Both TCS and Cognizant declined to comment, citing the same reason.

Perot generated about $2.6 billion in annual revenue when it was acquired by Dell in 2009, according to company reports.

Assuming that Perot's revenue increased at a compounded annual growth rate of 2-3%, the IT management business may currently generate about $3.1 billion, according to David J Koning, senior research analyst at US-based Robert W Baird & Co.

"While a Perot acquisition would likely dilute revenue growth, it could potentially add 5-10% to EPS (earning per share), and we doubt CTSH's (Cognizant's) multiple would fall much lower than the current level as long as 10%+ organic revenue growth can continue," Koning said in a note dated December 28 that analysed the potential implications of Cognizant buying out Perot.

TCS had bid a shade below $4 billion during its initial talks, Cognizant and Atos came up with $4.2 billion and $4.3 billion, respectively, the people said.

Cognizant currently generates a little over $12 billion in annual revenue and acquiring Perot would put it within striking distance of TCS and even help to potentially overtake it. If TCS gets Perot, it will widen its lead over the rest and become more than twice the size of closest Indian rival Infosys, which currently generates close to $9 billion in annual revenue.

TCS currently has revenue of over $16 billion annually.

"Dell Perot would mean different things to different people as it offers both access to US marquee clients and strong exposure to the healthcare sector. Cognizant is already strongly entrenched in both, thus it could be read as defensive play to shore up its position. Conversely, TCS, or any other organisation suggested to be bidding, would see a more compelling fit. However, the crucial issue appears to be pricing as thus far nobody appeared to be willing to match Dell's expectations. As with most things in life, all will come down to financials, not Power-Point," said Thomas Reuner, managing director at HfS Research.