SQS recently briefed NelsonHall on its planned acquisition of a majority stake in software testing pure-play Thinksoft Global for €17.5m in cash.

What will Thinksoft mean for SQS?

• More than double its Indian delivery capability: Thinksoft will bring in 800 FTEs and a center in Chennai. SQS currently has a center in Pune with 700 FTEs
• Retail banking client base: retail banking: accounts for 94% of Thinksoft revenues. Financial services accounts for 44% of SQS revenues, but delivery is typically onsite or nearshore – the SQS client base serviced from India is largely drawn from the manufacturing, retail, telecom service provider and computer games sectors
• Expand its offerings portfolio: Thinksoft derives 50% of its revenues from UAT, largely around core banking testing, specializing in banking applications such as Temenos and Infosys Finacle. This is an area where SQS is not present, and one not commonly performed by testing services vendors
• Broaden its geographical presence: SQS is looking to Thinksoft to support growth in new SQS geographies. SQS is Europe-centric, though developing very fast in the U.S. (albeit from a small base), where it is positioning on Siemens PLM software testing.  Thinksoft has a more balanced geographical mix: in its FY 2013 Europe contributed ~37% of revenues, Asia ~36% and North America ~27%. In the U.S., where SQS has strong ambitions, Thinksoft will double its revenues to a NelsonHall estimated ~$20m (calendar 2013). The move is significant though SQS will remain a small player in the country. Thinksoft in the U.S. brings banking clients in the East Coast. In order to accelerate its growth in the U.S. banking sector, SQS plans to build out its onshore delivery capability within six months. Thinksoft also adds presence in Singapore and Australia.

SQS plans to purchase 51% to 53% of Thinksoft capital, allowing it to gain operational control. It has ruled out buying out the full stake for cost reasons and also because of specificities of the Indian regulation in this field, which might demand an increase in price.
SQS expects that the integration of Thinksoft into SQS will be relatively easy given the lack of client and geographic overlap:

• SQS intends for Thinksoft in Chennai to remain specialized on financial services an for its Pune operation to continue to focus on other sectors including manufacturing, telecommunications, retail, gambling and gaming
• Methodology and processes: SQS will work with Thinksoft on harmonizing methodologies and processes in the financial services sectors
• SQS is integrating Thinksoft’s sales teams in Europe and the U.S. into the local SQS sales operations in those countries.

SQS has set a target of having an Indian headcount of 4,000 within three years. In the long term SQS is looking for Indian delivery to account for 50% of revenues.

This acquisition marks an evolution in strategy for SQS, to focus once again on top line growth: in 2012 SQS reorganized into three services lines: Managed Services, Regular Testing Services, and Specialist Consultancy Services, in order to improve its operating margin, accepting a lower rate of revenue growth for a couple of years (11% in 2012, compared with 16% in 2011; 2013 expected by NelsonHall to be ~5%).