The Everest Research Institute recently released a study called ‘Plugging the gaps -- Mergers and acquisition in IT outsourcing’ that stated that with the slowdown of the US economy, convergence of market models for infrastructure outsourcing, and Indian suppliers' move up the ADM value chain and are likely to have deep impact on merger and acquisition activity in the IT outsourcing (ITO) sector.

The study included an analysis of ITO market changes and trends driving M&A activity, examines 114 recent M&A engagements, and leveraged from the Institute's database of 300 tracked captives to analyze drivers of M&A in ITO and forecast likely future acquirers and targets.

"The economic crisis will likely affect M&A activity as North-American focused suppliers look to diversify their revenues by expanding into new geographies," said Ross Tisnovsky, vice president, Everest Research Institute. "Cash-rich Indian companies experiencing slow growth will prompt M&A activity as will the exit of private equity firms seeking divestures from investments. We're also seeing some large multinational companies divest in captives or use them as revenue generators."

The study also highlighted the following:

-- ITO supplier acquisitions has increased steadily over the past five years with MNC’s signing the largest deals

-- "Gap in services portfolios" and "industry-specific skills acquisition" were the most prevalent reasons for two-thirds of M&A deals signed over the past five years.

-- Most acquisitions are occurring in North America but gaining traction in Europe where ITO suppliers are purchasing larger firms compared to other geographies

-- Average revenue multiple paid by offshore and MNC companies are similar, but MNCs show much larger range of values

-- Sell-off activity is a likely eventual evolution for captives and also proves commercially as well as operationally beneficial to both parent and an acquiring supplier.