IT firms spend big on acquisitions as AI hits growth

Indian IT service providers are increasingly pursuing acquisitions to gain access to clients, geographic presence and market share as AI-led pricing pressure weakens organic growth.

Companies in the top-tier, mid-tier and emerging IT service segments spent a record $7.1 billion in the last two years on acquisitions — $5 billion in 2025 and $2.1 billion in 2026 thus far, according to data from tech consultancy UnearthInsight.

Coforge’s $2.35 billion purchase of Encora in December 2025 leads the pack, followed by Tata Consultancy Services’ $700 million Coastal Cloud acquisition around the same time. The recent string of acquisitions, however, showcases a trend of buying smaller or slowing businesses at relatively low valuations to accelerate client adoption.

Mumbai-based LTM purchased Randstad’s technology and consulting services business in parts of Europe and Australia in a €160 million ($170 million) deal earlier this month, despite the acquired unit clocking over $500 million in annual revenue, while Hexaware bought Consulting Professionals Services Holdings Ltd (CPS) for about GBP 11 million.

2026 also saw Wipro’s $375 million acquisition of Mindsprint and Tech Mahindra’s 28 million Canadian dollar purchase of Avant Techno Solutions, where the target companies have experienced annual revenue declines in recent years.

The transactions are also mainly cash-based, either with upfront payment or bundled with performance-linked payouts, funded by their own balance sheet. That’s preferred by the typically cash-rich tech service providers. The top IT companies — TCS, Infosys, HCLTech, Wipro and Tech Mahindra — reported cash flows between 106% and 115% of their net income for FY26.

The exception to the pack is Coforge, which raised a three-year term to fund the Encora purchase.

“These companies may be declining (in revenue), but they (acquisitions) will give IT service providers inroads into verticals or geographies,” said Biswajeet Mahapatra, principal analyst at Forrester. “Because of AI, there are pressures on the margins and no organic growth. So growth can happen only if you acquire new customers and can position new services.”

Larger companies in the $300 billion tech service industry had a tepid fourth quarter. Annual revenue either declined or grew in low single digits as adoption of AI led to pricing compression in contracts.

The acquisitions are taking place amid the disruption in the sector increasingly tied to AI, industry executives said, with companies looking at structured deals and platform IP as a way to make up for revenue loss.

“Even for AI implementation, context in terms of the domain and geography is fundamental,” LTM chief executive officer Venu Lambu had told ET earlier.

“Especially in markets such as Europe, AI solutions are going to be built around sovereign and regulated architectures. Tech is available in abundance, but revenue in AI will come around when we do enterprise transformation, which will come from domain and functional expertise.”

Inheriting clients through acquisitions enables wallet share expansion in a market that’s otherwise highly competitive for both.

“Because these are the smaller companies, they cannot offer a huge range of services to these companies. But they have good client access with limited services,” said Pareekh Jain, CEO at IT research firm EIIR Trend.

When companies like LTM or Wipro acquire small enterprises, their resources and range of services can be offered to new clients, in a ‘land and expand’ manner, helping scalability, he said.

The lack of growth or the carve-outs of non-core business in the target companies build the case for cheaper acquisitions. Randstad’s business and Tech Mahindra’s Avant Techno Solutions were valued at a price-to-sales ratio of 0.3-0.5x, while Wipro’s Mindsprint and Infosys’ Optimum and Stratus deals were valued at 1.5-2.8x.

Meanwhile, in Wipro’s instance, the company counts on Mindsprint’s platform IP to deliver value. This includes Farmsprint for plantation management and ProcureSPRINT for procurement transformation, among others, bringing together domain capability, delivery scale, and sector-specific platforms, according to a blog post by Everest Group.

“Tech service firms are currently being swallowed by a lot of vendor consolidation deals and (acquisitions) may be a good way to counter that,” said Abhishek Pathak, lead IT analyst at Motilal Oswal Financial Services. “But the problem at hand now is not vertical/geography, but the underlying technology. Firms will need to acquire horizontal capabilities, in this case AI-led, to sell across verticals, so we could see a shift in M&A strategy.”