H1-B visa reforms could drive an acquisition spree from Indian IT Services firms

By Ramone Param, Associate Director, Market Intelligence & Buyer Coverage, Equiteq.

Earlier this week, the US Citizenship and Immigration Services (USCIS) announced that it would take a more targeted approach to site visits of H-1B requesters and issued guidance that entry-level computer programmer positions could not be presumed specialty occupations, a requirement for the issue of a H1-B. The Justice Department also issued a press release cautioning employers petitioning for H-1B visas to not discriminate against American workers. There is an expectation that an executive order will also be introduced to call for a further review of the H-1B work visa.

Indian IT Services firms expected to face increasing pressures from H1-B reforms

The tightening of U.S. visa rules under the new administration is expected to place increasing pressures on costs for the Indian IT outsourcing industry. Over 60% of the industry’s export revenue comes from the U.S. and this work is dependent on cheap non-American coders and engineers. These workers will typically use H1-B visas to work locally, while getting paid a lower wage as compared with local non H1-B employees. Although the H1-B visa system works via a lottery system, Indian outsourcers are considered to be the top recipients of these visas, with some believed to be using loopholes, such as filing multiple applications for individual workers, which are not available to smaller companies.

Top sponsors for H1-B visas in the U.S. in 2016

Note: Graph shows number of Labor Condition Applications per company.
Source: Quartz India

The new administration is expected to clamp down further on these practices, as well as to increase visa fees, and raise the minimum wage of a H1-B visa immigrant from $60k to $130k. Businesses are also expected to be pressured in other ways to use domestically sourced workers. The potential impact this will have on costs for Indian outsourcers is already being highlighted in equity analyst commentary related to recent share price declines of the leading listed players.

M&A and local hiring is expected to increase

Although immigration reform is a focus of the new administration, drastic changes to the H1-B visa system have been talked about for some time. In anticipation of these changes, the large Indian IT services players have already been transitioning their U.S. business model by:

  • Acquiring U.S. companies with local resource;
  • Ramping up local hiring through experienced and new graduate hires;
  • Investing in near-shore virtual centers to enable non-American support to work virtually for their U.S. clients; and
  • Transitioning away from labor intensive onsite projects by investing in automation and artificial intelligence, and focusing on cloud computing engagements.

Some of the recent high-profile acquisitions in the U.S. include Wipro’s acquisition of Appirio, Tech Mahindra’s acquisition of CJS, as well as Infosys’ acquisition of our client Noah Consulting. Our latest discussions with buyers across the IT sector, along with high-profile commentary from senior executives at the leading Indian IT outsourcers, suggests that a ramp-up in U.S. acquisitions and local hiring is on the horizon.

Cloud services, digital and management consulting will be focus areas for deals

We expect that buyers will be focusing their acquisitions on those areas where they can fill gaps in their capabilities, particularly related to high-growth sectors like cloud services, artificial intelligence and analytics.

An article from HfS highlighted cloud services niche providers like Onesource Virtual, Collaborative Solutions and Sierra-Cedar as being potential targets for an Indian IT buyer. Interestingly, the same editorial also considered larger strategy consultancies like AT Kearney as a potential acquisition target. A deal like this would enable an Indian buyer to significantly develop their footprint in the U.S., while also moving further up the value chain. The same synergy rationale also applies to why we expect these buyers to be increasingly interested in smaller, sale-ready, domestic companies across these industries.

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