Tech Mahindra has agreed to acquire SOFGEN to enhance its core banking systems integration (build, run, operate) capabilities. The acquisition is expected to close by the end of March.

Swiss-headquartered SOFGEN is a specialist in Avaloq and Temenos platforms and also has capabilities in TCS BaNCS and Misys. SOFGEN has 450 employees, including >70 in India, serving 150 clients with 20 Tier 1 client relationships. The remainder of SOFGEN's delivery people are based on client premises. 

Banking, financial services and insurance currently accounts for 10% of Tech Mahindra's revenues (~$90m in Q2 FY 15). This acquisition will enhance Tech Mahindra's capabilities in the private banking and wealth management segments and bring in some onshore capabilities. SOFGEN will bring in annual revenues of ~$45m. Tech Mahindra is paying >$30m in cash, plus earnouts. 

Tech Mahindra has been growing its BFSI revenues by ~18% CAAGR since it acquired Satyam four years ago. It has done this by specializing in narrow segments of the financial services market (e.g. cards, payments, and mobility) which allows it to deliver a differentiated service. The acquisition of SOFGEN is part of its strategy to acquire additional capabilities to broaden its portfolio of offerings and offer services on process areas that span the plan, build, deploy, and operate spectrum. 

SOFGEN brings the following key capabilities to Tech Mahindra:

• Consulting and integration capabilities with core banking solutions that have large market share with banks focused on wealth management (i.e. Temenos and Avaloq)
• Large presence in mature markets (especially Europe and the U.S.), with ~60 tier 1 mature market clients, and presence in emerging markets with ~45 regional banks. SOFGEN includes among  its clients all major Swiss private banks
• Unique IP. SOFGEN has a proprietary tax payment solution, Save Tax, which is used for multi-jurisdictional tax calculation and reporting 
• Advanced employee experience, with ~11years average delivery experience per employee (in Europe, 12 to 16 years)  
• Ability for employees to work with other IP that Tech Mahindra has (e.g. UBS' reference data management software, which was acquired and modernized by Tech Mahindra over the past two years)
• Employee and management contractual agreement to remain and earn out the purchase price over three plus years.

Tech Mahindra believes that it can leverage SOFGEN's transformation engagements to add ITO, ASP, and BPO services with the banks. It also expects to leverage its operational engagements into transformation engagements (consulting and integration). 

Can this work?

Tech Mahindra has successfully grown its BFSI business ~18% per year, and looks likely to have grown it even faster this past year. Banks are needing to transform their platforms to conform with changing regulations and changes to their own business models. Under the current industry conditions, which will last at least five more years, banks are reducing their exposure to risk assets and increasing their exposure to low-risk businesses such as wealth management. Banks need to modernize wealth management platforms but they still need to aggressively reduce cost after that modernization. The ability to integrate platform modernization with operations management is critical to the aggressive cost control exercise banks are undergoing.

Tech Mahindra has the right plan, but can it execute? Retention of consultants after an acquisition is notoriously difficult. In addition, client management with an enhanced set of offerings can fail badly if poorly executed. However, Tech Mahindra has demonstrated an ability to effectively integrate an acquired services firm when it acquired Satyam and proceeded to build the legacy Satyam business beyond its original levels.

Succeeding with the "gnomes of Zurich" will be a greater challenge than with Satyam's clients, but the rewards if successful will be much higher because it will create a business moat based on domain expertise with industry leading clients. Tech Mahindra's BFSI leadership has long experience working at the leading global custodians and universal banks. They understand the challenges from the clients' point of view, and they are well positioned to succeed in what will be the fastest growing area of banking globally over the next five years.