TCS merges Japan unit with Mitsubishi arm

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Tata Consultancy Services (TCS) has signed a deal to merge its Japan unit with Mitsubishi Corporation’s IT arm to create a software services firm that will serve the strong Japanese market by leveraging the reach, competencies and domain expertise of both the firms.

The merger will create a strong IT services unit with a base of over 2,400 associates in Japan, TCS managing director and CEO N Chandrasekaran said.

TCS will hold 51 per cent in the new entity and Mitsubishi the remaining. India’s largest IT services exporter will spend $50 million in the cash-plus-equity deal, which is expected to close by June. TCS has an option to increase its stake to 66 per cent.

Chandrasekaran said TCS Japan and Nippon TCS Solution Centre wo­uld be merged with Mitsubishi’s wholly-owned IT subsidiary IT Frontier Corporation. “TCS will now have the scale and strong local presence, and a full range of global capabilities to serve top Japanese firms and boost gro­wth in that market,” he said.

According to CEO of TCS, the new entity is expected to generate $600 million in annual revenue, with $300 million coming in the first three quarters of 2014-15. “We hope to take the company beyond the $1 billion revenue mark in the coming years,” Chandrasekaran said.

Ashish Chopra, IT analyst at Motilal Oswal Securities, said the deal, if closed by June, would add around $375 million to TCS’ incremental revenue this financial year. It would lend TCS an edge in the Japanese market with 1,600 additional full-time employees and over 1,600 business associates.

Mitsubishi has existing contracts worth $250 million, and there are other Japanese clients in hi-tech, manufacturing, BFSI and retail verticals.

“Japan is the second largest market for IT services and Indian players have struggled to gain a foothold there. In that regard, TCS’ move opens up the region for the company, creating an additional source of revenue over the long-term,” Chopra said. “ITF has relations with big Japanese companies, a strong workforce and competencies in retail, distribution and trading segments. This will complement deep domain knowledge, technology expertise and strong execution track record of TCS,” he added. Chopra said global network delivery model capabilities of TCS would enable the globalisation ambitions of Japanese firms.

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