With the quarterly revenue gap between Wipro and its challenger Cognizant just around $33 million for the quarter ended December 31, 2010 - the move by Wipro Technologies, the global IT business of Wipro Limited, on Friday evening to announce signing of an agreement to acquire the Global Oil and Gas Information Technology practice of the Commercial Business Services business unit of Science Applications International Corporation (SAIC) gives the country's 3rd largest IT services firm some headroom to keep Cognizant at bay, at least for sometime.

Wipro Technologies is paying $150 million to acquire $188 million revenues (for last 12 months) of SAIC's business. The company officials expect Wipro to report the acquired revenues from the April-June quarter, subject to customary closing conditions and regulatory approvals. This means, a quarterly revenue addition of $47 million for Wipro's IT business. The additional revenues do not put any stress on the balance of Wipro as it is funding it through internal cash resources.

SAIC's acquired business, which is expected to see 1,450 employees transition to Wipro across North America, Europe, India and Middle East, currently has an implied margin of 13.4 per cent, lower than Wipro's IT business historical margins. But Wipro management is confident that the margins will be in line or even better in 2 years time. The acquisition is immediately Earnings Per Share (EPS) accretive.

The India and UK part of the acquisition is an equity purchase while the US part is an asset purchase. Besides putting that much-needed runway between itself and Cognizant, the acquisition appears to be complementary on the geographic front as Wipro's current Energy SBU is focussed on Europe while SAIC's unit is said to be focussed on the United States. Financially, the combined SBU will likley contribute 10-11 per cent to Wipro's consolidated revenue.

With the acquired SAIC unit entrenched on the upstream side, which is seeing greater IT spends compared to downstream, the revenues for the Wipro Eneregy SBU from upstream will go up from 5 per cent currently to 17.5 per cent post-acquisition.

SAIC’s Global Oil and Gas Information Technology practice provides Consulting, System Integration and Outsourcing Services to Global Oil majors with significant domain capabilities in the areas of Digital Oil Field, Petro-technical Data Management and Petroleum Application Services addressing the upstream segment.

Wipro’s Energy, Natural Resources and Utilities Strategic Business Unit (SBU) is a high-growth SBU and this acquisition will further strengthen Wipro’s leadership position. IT spend in this sector is expected to grow as customers increasingly look to grow newer streams of revenues, optimize their operational cost and find better ways to become environmentally conscious.

Anand Padmanabhan, Senior Vice President, Energy, Natural Resources and Utilities SBU, Wipro Technologies said, "Oil & Gas companies are investing in the upstream business while looking at rationalizing cost through IT. The acquisition of SAIC’s Global Oil & Gas Information Technology practice will strengthen Wipro’s existing Energy business unit in becoming a long term strategic partner in our customer’s transformation journey. We are happy to have the SAIC team on board. Their domain consultancy and competencies significantly enhances Wipro’s capabilities in the Upstream Oil & Gas space and further strengthens Wipro’s position as an end to end leader in servicing customers.”

It is estimated that upstream IT spending is around $19 billion per year and is growing at Compounded Annual Growth Rate of 10 per cent every year.

“We are excited at the prospect of joining a company that has such a strong, strategic focus in multi-national commercial IT services,” said Rex Ballard, Senior Vice

President and General Manager of SAIC’s Commercial Business Services business unit.

“Bringing our skills and client base to Wipro increases our combined market

potential and positions us to capitalize on commercial business opportunities across the full breadth of the oil and gas industry. The combined organization will give clients access to an enhanced portfolio of technologies and solutions and provide employees with increased opportunities for career development,” Ballard added.

Wipro Technologies has 120,000 employees and clients across 54 countries.