The board of Coforge authorized the $2.35 billion purchase of Encora and the issuance of 93.8 million shares. With a planned revenue of $2 billion by FY27, the combination will produce a $2.5 billion company that focuses on AI, cloud, and data services.
Bengaluru: On Friday, Coforge Ltd. announced the biggest purchase by an Indian IT services business, agreeing to pay $2.39 billion to acquire Encora, a US data analytics and digital engineering company. Analysts said the deal is steeply priced but may significantly extend the company's growth runway.
The deal breaks the previous record, which was achieved in 2018 when IBM sold seven software items to HCL Technologies for $1.8 billion.
Advent International and Warburg Pincus, two of the largest private equity firms, hold California-based Encora, which completed the previous year with $516 million in revenue. The agreement will increase Coforge's staff from approximately 34,000 at the end of last year to approximately 9,200.
Noida-based Coforge stated in a filing to the stock exchanges that it will primarily finance the acquisition through equity, giving Advent, Warburg Pincus, and a few minority shareholders of Encora shares valued at $1.89 billion. The deal states that Coforge will issue 93.8 million equity shares at a price of ₹1,815.91 each.
After that, it will use a qualified institutional placement (QIP) to raise up to $550 million to pay down Encora's debt.
The PE investors will eventually hold 20% of Coforge, which closed last week with a $6.2 billion market value. Additionally, they will continue to have the authority to name two directors to the board of Coforge, which is entirely owned by public investors and has no promoter.
Coforge CEO Sudhir Singh addressed investors and shareholders on Friday night, "This is a defining moment for the organization." "The next eight years will be just as exciting, if not more so, than the previous eight thanks to this acquisition."
"We become a $2.5 billion tech services company when we add this asset, with a core $2 billion coming from AI-led engineering data and cloud services alone," Singh stated.
Expensive purchase
The filing states that Encora's adjusted Ebitda of 19% is equivalent to roughly $114 million. Analysts describe it as an expensive investment because it is more than 21 times Ebitda, or earnings before interest, taxes, depreciation, and amortization.
According to an executive who wished to remain anonymous, "paying more than 21 times Ebitda is a very expensive acquisition, but then, the company is using its shares to fund this, so investors shouldn't complain." "However, the stock decline could be explained by the possibility of a QIP."
The Nifty IT dropped 1.03% to 38,572.3 points, while the company's shares dropped 3.67% to ₹1,674 on the National Stock Exchange (NSE).
When a business raises money by issuing shares through the QIP route, minority investors usually see some dilution.
One of the numerous funding methods being investigated just to reduce the debt is QIP. If we do want to conduct a QIP, it won't take place until after closing, which is in about six months. There is a chance that a QIP will never be activated because we will also look into alternative funding options, according to the Coforge statement.
The purchase was comparatively expensive, according to Ashutosh Sharma, vice-president and research director at Forrester. He stated, "Coforge is paying a price that is nearly four times the annual revenue (of Encora)." "It offers Encora's current owners a very good exit; otherwise, they might not have accepted this deal."
According to Sharma, the acquisition's success hinges on Coforge's ability to incorporate Encora's talents into its larger company, as well as "how well they are able to leverage the synergies across the two organizations."
Encora's engineering prowess would accelerate Coforge's expansion, according to another expert, but execution would be crucial.
According to Phil Fersht, CEO of HFS Research, "Encora brings deep engineering talent and strong client relationships that complement Coforge's vertical strengths, especially in BFSI, travel, and insurance." "When taken as a whole, this makes an end-to-end transformation partner more credible."
"The opportunity is significant, but execution will be critical," Fersht continued. Without upsetting Encora's engineering culture, Coforge must swiftly integrate people, delivery models, and go-to-market motions. How well leadership transforms combined scale into repeatable, AI-enabled delivery outcomes will determine success.
When in acquisition mode
Coforge, the seventh-largest IT services company in the nation with $1.47 billion in revenue at the end of the previous year, had been considering acquisitions for a while. It paid ₹2,000 crore in December 2024 to acquire the engineering services company Cigniti Technologies, situated in Hyderabad.
Other larger competitors of Coforge have also considered acquisitions. The largest IT services company in the nation, Tata Consultancy Services Ltd. (TCS), agreed to invest $6.5 billion over six years to establish a 1 GW data center business, but this year it paid $774 million to acquire two businesses.
The Encora acquisition is a boost to Coforge CEO Singh, who has led the company ahead of competitors in recent years. This acquisition is anticipated to accelerate the expansion of Coforge, the fastest-growing IT business in India, which had a 31% increase in revenue last year.
According to Singh, one of the main motivations for purchasing the business was to expand their clientele.
"We've spoken with executives of Encora's largest accounts, and it's clear to us that they have lost or abandoned a lot of business simply because they lacked scale when it comes to BPS (business processes services), when it came to AI-led QE (quality engineering), when it came in some cases to enterprise platforms, especially cloud based ERP (enterprise resource platforms), and in some cases when it came to data and cloud based operations as well,” said Singh.
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