January 19, 2011

Trip to China

by Philip Ma, Managing Director, MergerTech Advisors

Last October our Chairman Marty Wolf came to China and gave a keynote presentation at an AmCham Shanghai IT industry event on Cross-border M&A in the global IT outsourcing industry.  Drawing from our experience in working with Indian IT outsourcing companies (ITO’s) on cross-border M&A transactions, he noted how M&A has become an integral part of their growth strategy.  Looking at valuation data and growth trends of the Indian ITO’s, it’s clear that the market rewards scale (at least $500M in revenue).  In contrast, China now has some publicly traded ITO’s that are trading at higher multiples than their Indian brethren but are much smaller in scale.  They are being rewarded for high growth rates, and our thesis is that they will need to drive growth via M&A in order to achieve scale and sustain those high growth rates from an increasing revenue base.  You can see the data behind these findings and more detail in Marty’s presentation slides, which are available on our web site here: AmCham_Presentation

Afterward I moderated a lively panel discussion with representatives from Chinese ITO’s and professional service providers to the ITO industry.  Some key takeaways from that discussion:

For the remainder of his trip, Marty and I met with senior executives from several of the top Chinese ITO’s.  Many have great ambition to challenge India as a center for IT outsourcing, and most are also looking to the domestic Chinese market for growth beyond their classic offshoring model.  This is consistent with what’s commonly recognized as a global macroeconomic reality; that China is a key linchpin in pulling the world economy out of recession.