Debt's driving Indian IT's new shopping spree

Indian information technology services companies are increasingly turning to debt financing to pursue large acquisitions, signalling a marked shift from the sector's long-held preference for debt-free balance sheets as they seek to strengthen artificial intelligence capabilities, expand into new markets and accelerate growth, The Times of India reported on July 2.The trend gained further momentum after Persistent Systems secured a $1.5-billion bridge financing facility from Barclays to back its proposed acquisition of German IT services company Nagarro, ToI's report (by Shilpa Phadnis) said.The facility, supported by a corporate guarantee of up to $1.7 billion from Persistent, underscores the company's willingness to leverage its balance sheet for a strategic transaction at a time when organic expansion across the industry remains under pressure.The financing reflects a broader change in capital allocation within the IT services sector, where companies are increasingly relying on external funding to acquire specialised capabilities rather than depending solely on internally generated cash.Also read | Govt lines up PSU stake sales to cushion budget hit from oilEarlier this year, Coforge arranged a $550-million three-year term loan from JPMorgan, Bank of America and HSBC to partly finance its $2.3-billion acquisition of Encora.Last year, Cognizant also combined debt with cash to fund its $1.3-billion acquisition of Belcan and separately borrowed to execute a $1-billion share buyback, a financing approach that was once uncommon among large IT services firms.Persistent's management said debt emerged as the most efficient funding option for the transaction.

Before announcing the proposed acquisition, the company had around $300 million in cash and no outstanding debt.It also evaluated multiple funding alternatives, including interest from private equity investors and the possibility of raising equity through a qualified institutional placement, but decided against equity dilution to preserve shareholder value.Also read | Mehli Mistry resigns from RNT Associates, Ratan Tata's investment officeThe company expects the acquisition to enhance earnings per share by about 5-6% during the first year after completion, excluding one-time integration expenses, while taking borrowing costs into account.Industry executives believe the growing use of leverage reflects structural changes rather than a temporary financing trend.

Rapid advances in AI, coupled with subdued demand for traditional technology services over the past few years, have made acquisitions an increasingly important route for companies seeking new capabilities, specialised talent and industry expertise.According to industry observers, companies that previously preferred maintaining sizeable cash reserves are now more willing to borrow because strategic acquisitions are viewed as a faster way to improve competitiveness and secure long-term growth prospects in an evolving technology landscape.At the same time, experts have cautioned that the strategy carries meaningful risks.

As AI reshapes enterprise technology spending, several mid-sized IT companies are attempting acquisitions that significantly increase their scale.

While such transactions can accelerate revenue growth and broaden customer relationships, they also expose acquirers to integration challenges and higher financial obligations.Analysts warn that if acquired businesses face disruption from AI-driven changes in client demand or fail to deliver anticipated growth, the additional leverage could strain balance sheets and erode shareholder returns.Borrowing heavily to achieve a sharp increase in revenue without corresponding improvements in profitability may also put pressure on valuation multiples over time.Market experts, however, argue that the quality of acquired assets will ultimately determine whether higher leverage creates value.They contend that debt deployed to secure differentiated AI capabilities, engineering talent, proprietary intellectual property or specialised platforms is likely to generate stronger long-term returns than acquisitions aimed primarily at expanding revenue.As competition intensifies across the technology services industry, they believe successful companies will be those that use acquisitions to strengthen strategic relevance rather than simply add scale. ...