The $31 billion engineering, research and development (E&RD) sector in India is in a jubilant mood with Japan’s Hitachi announcing the acquisition of US-based software development firm GlobalLogic for $9.6 billion.
The deal if goes through will be the biggest in the engineering services space, and the biggest by any Japanese firm. Before this deal, Capgemini had acquired Altran Technologies for $4 billion in 2020, and a few years earlier Harman International Industries had acquired Romesh Wadhwani’s Symphony Teleca in a $780 million deal, which was later acquired by Samsung.
Hitachi expects the addition of GlobalLogic’s advanced digital engineering capabilities and its solid client base that include major technology companies, to strengthen its digital portfolio. The acquisition will create synergies across Hitachi’s five sectors – IT, energy, industry, mobility and smart life – and automotive systems business (Hitachi Astemo) by accelerating the advanced digital transformation of social infrastructure such as rail, energy, and healthcare at a global scale.
US-headquartered GlobalLogic has a significant presence in India, with a global headcount of 20,000. Over half of its employees are based in Noida, Hyderabad, Bengaluru and Chennai. The company had been ramping up its presence in India since 2019.
“With a $9.6 billion valuation, it looks like 11-12X of sales for GlobalLogic. This is in line with some valuation of other pure-play software product firms as EPAM. Even Happiest Mind valuation is in a similar range,” said Parekh Jain, founder and lead analyst, EIIRTrend.
The E&RD space has in recent times become a significant focus for large players as engineering is a key component in the digital transformation story. For the digital segment, digital or software product engineering is the backbone of all software platform development and digital plumbing
For the physical segment, Industry 4.0 is driving transformation in manufacturing and asset-intensive industries. Not present in these sectors could mean not being able to provide a full set of solutions to customers and thereby allowing competitors with an opportunity to get a leg up.
Moreover, the market size and current growth rate make engineering an attractive segment to be in. “The global R&D spend is in the order of $1.5 trillion, and outsourced R&D spend is about five per cent of it only. Also, the current market for engineering services is growing faster than other service lines, such as IT and BPO. As growth in IT and BPO is slowing down, Mega Providers are looking for the next engine for growth, and engineering ticks all boxes,” said Jain.
The Hitachi-GlobalLogic deal is also significant because it is one of the biggest deals in the engineering space. Prominent players in the space include Pune-based Persistent Systems, Cyient and QuEST.
Jain believes that the deal will have a huge impact in India. “More companies and PE firms might look for acquisition or investment in software product engineering companies. Even pure-play engineering service providers who don’t have a large footprint in software product engineering will look at this more seriously. Importantly, this will inspire a generation of new entrepreneurs in the software product engineering space. This is a proof point that this sector can command high valuation similar to software products or B2B SaaS firms,” said Jain.
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