Debt Financing Emerges as Key Strategy for Indian IT Acquisition Funding
BENGALURU: Persistent Systems has secured $1.5 billion in bridge financing from Barclays to fund its acquisition of German IT firm Nagarro. This move indicates a shift in the Indian IT sector, which has traditionally favored cash-rich, debt-free balance sheets. The financing, supported by a corporate guarantee of up to $1.7 billion from Persistent, reflects a growing trend among IT companies to utilize debt for transformative acquisitions amid slowing organic growth.
The trend of leveraging debt for acquisitions is gaining momentum. Earlier this year, Coforge obtained a $550 million term loan from JPMorgan, Bank of America, and HSBC to finance its $2.3 billion acquisition of Encora. Last year, Cognizant partially funded its $1.3 billion acquisition of Belcan through a combination of cash and debt, also borrowing for a $1 billion share buyback, a departure from the industry’s reliance on internal cash generation.
Persistent CEO Sandeep Kalra stated that debt was the most efficient financing option for the acquisition. He noted that the company had approximately $300 million in cash and no debt prior to this deal. Kalra emphasized that they received significant interest from private equity firms without needing to dilute equity. He projected that the acquisition would be 5%-6% accretive to earnings per share in the first year, excluding one-time costs, even after accounting for debt expenses.
Industry experts suggest that this financing trend signals a deeper structural change in global IT services. Ramkumar Ramamoorthy, a partner at Catalincs, remarked that companies are now more willing to incur debt for acquisitions, believing they will lead to sustainable long-term growth. Former Infosys CFO Mohandas Pai noted that smaller IT firms are pursuing large acquisitions to accelerate growth and expand revenues, even if it stretches their balance sheets. However, he warned that substantial debt to boost short-term revenues carries significant risks. Phil Fersht, CEO of HFS Research, added that successful firms will focus on using their balance sheets to gain relevance rather than just revenue.
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