Cognizant’s Acquisition of Belcan – An Engineering Services Leaderboard Shake-up | Blog

Cognizant’s acquisition of Belcan for US$1.3 billion marks a significant expansion in its engineering services portfolio. This strategic move enhances Cognizant’s capabilities, positioning the company closer to the top-tier engineering service providers. Reach out to us directly to discuss this topic further.

Cognizant recently announced the acquisition of Belcan, a portfolio company of AE Industrial Partners, for a total enterprise value of US$1.3 billion. This is among the largest acquisitions in the history of Cognizant, which, interestingly, has acquired seven companies with an engineering services focus since CY2021.

This is also the biggest acquisition of recent times in engineering services – a space that has been known for rampant M&A activity and sees a marquee acquisition every few years amid tens of tuck-in acquisitions. The last large acquisition in this space was back in 2022 when Modis acquired Akka Technologies (EV of US$2.36 billion).

Based on revenue estimates for Belcan, this acquisition sits at a modest revenue multiple of ~1.55x, which is slightly lower than the other recent acquisitions in this space, such as:

• Infosys’ acquisition of In-tech (EV: EUR450 million; 2.6x revenue)
• Infosys’ acquisition of InSemi (EV: INR280 crores, 1.8x revenue)
• HCLTech’s acquisition of ASAP (EV: EUR250 million; 1.6x revenue)

This seems like a bargain deal for Cognizant (especially considering that we saw valuations as high as 9.6X revenue, as recently as 2021).

So, what does Cognizant stand to gain on the back of this acquisition? Let’s discuss.

A significant elevation of its engineering services portfolio

Everest Group publishes an annual list of Top 50 Engineering Service Providers based on their engineering services revenue and growth. Cognizant was positioned at #7 in the last edition of the list, preceded by Accenture, Akkodis, Alten, Capgemini, HCLTech, and TCS.

Considering the combined engineering services portfolio of Cognizant and Belcan – the combined entity would inch closer to the top 5 providers.

A sizable play in a growing and uncrowded space

Asset-heavy verticals, particularly the automotive vertical, have been the hot favorites among service providers from a capability-building and acquisition standpoint. This has been on account of the resilience these verticals have showcased over several quarters despite the economic slowdown. While Cognizant broadly adhered with this industry trend as it picked Belcan, it took a slightly unconventional approach by focusing to tap into the aerospace and defense (A&D) vertical.

There are two key reasons for this shift in focus to A&D. Firstly, in CY 23, outsourcing in this vertical grew the fastest (9-11%) on account of enhanced defense spending and a post-pandemic recovery in aviation and aerospace. Secondly, compared to automotive, this vertical is less catered to by providers. While automotive is catered to by 90% of the providers featured in the ES Top 50 list, only 60% of the providers cater to A&D, thus making the space less crowded.

To bolster Cognizant’s asset-heavy portfolio, Belcan brings a vast pool of 6,500+ specialized engineers across not just A&D, but also automotive, industrial, and even cybersecurity. A&D remains their key focus area, where, along with expertise, Belcan also brings a well-established client base with “blue-chip” enterprises and state defense departments such as the US Department of Defense (DoD). This acquisition, along with capabilities, also fills whitespaces in the geographic footprint. For example, a strong network of offices in the United Kingdom will bolster Cognizant’s European presence, while the innovation centers in offshore locations will serve as hubs for high-quality technical solutions dedicated to A&D.

Were there other approaches that Cognizant could have considered for the desired outcome?

In recent quarters, IT service providers such as Cognizant have struggled with sluggish or stagnant top-line growth due to budget cuts, project downsizing in key verticals, and reduced focus on discretionary spending.

Juxtaposing this need with the continued growth momentum (albeit slowed down than in the past) being observed in the ER&D spending across enterprises has led to a faster growth rate in the engineering outsourcing services market viz-a-viz the traditional IT services outsourcing. In that spirit, the engineering services market seems to be the right choice to catapult growth and beat the slowdown.

While it is easy to zero down on the engineering services arena, it is difficult to follow the traditional approach and build capability organically, as has been the case in the past. This is because of the unique nature of engineering services, which is characterized by new-age design thinking (across software product engineering) and deep-domain expertise (across manufacturing and connected products engineering). In such an arena, it becomes poignant for providers to adopt the inorganic route, which enables quick muscle building and maybe relationships as well (as in the case of Cognizant – Belcan).

At the same time, this acquisition also brings in diversification from a vertical standpoint as currently, Cognizant’s top-line leans heavily towards BFSI and healthcare. While these industries are recovering, their growth isn’t as rapid as some of the asset-heavy industries.

To learn more about the engineering services landscape, reach out to Ankur Jain, [email protected], Mayank Maria, [email protected], and Nishant Udupa, [email protected].