Expanding Growth Platforms Inorganically

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The ongoing Eurozone debt crisis and the pending decision over the fiscal cliff have forced several companies to shift their focus towards the emerging markets. The emerging markets are advancing at a higher pace and in the next five years they're expected to dominate the performance of the global economy. By 2015, the emerging markets are expected to contribute ~62% to the total global economic output. As a result, most of the companies around the world are focusing on acquisitions to expand their base in the growing economies.

Accenture (NYSE:ACN), the world’s second largest technology consulting company, is actively involved in various acquisitions and this aggressive acquisition policy has been a key catalyst for the company’s growth in the last 3-4 years. This strategy has helped the company to diversify its portfolio and expand its presence globally. In terms of revenue, Accenture generates ~15% of its total revenue from the Asia Pacific, ~40% from Europe/Middle East/Africa and ~45% from the US. Therefore, the emerging market remains a huge opportunity before the company. 

Let's have a look at Accenture's recent acquisitions which would diversify its business and which have been done aiming at generating higher revenue in the future.

avVenta 

Accenture recently announced its acquisition of avVenta worldwide, which is a digital production service provider. The company is based in Costa Rica and has some big names in its customer's kitty such as General Motors, AT&T, Sony, Apple,  and Yahoo!. With avVenta’s strong platform of marketing operations, Accenture will expand into various new services such as the development of marketing strategy and operating the complete marketing systems and campaigns. This acquisition would broade Accenture's portfolio of marketing services and will streamline the complete process. This will surely help the company to earn better returns on its investments. 

NewsPage

Accenture most recently completed its acquisition of the Singapore based mobility software company NewsPage Pte which provides its services to the consumer goods industry. This is another acquisition which will expand the company's base in mobile capabilities. Via this acquisition, NewsPage will provide various add-ons to the existing Accenture CAS (Consumer Goods and Services) platform. These improvements will make the CAS platform compatible with Windows, Android, and iOS devices and will provide multi-platform mobility to it. Accenture will also benefit from the strong client base of NewsPage in the emerging markets. 

Accenture shares a great connection with SAP AG (NYSE: SAP) with a history of around 30 years. Both the companies have worked together to maximize their profits by serving their mutual customers. The customers are the ones who are gaining the most out of this partnership with the combined strength of the two market leaders. I see this partnership as a key differentiator for both companies. Accenture is continuously making investments to sustain their relationship and develop a full range of SAP capabilities. The company recently announced the expansion of its innovative centers for SAP solutions with a new one opening in South Africa. This will be the next one in the list of existing innovation centers in the US, Japan, China, Australia, Singapore, France and India.

The new center will help Accenture’s clients in South Africa and sub-Saharan Africa with the latest SAP technologies such as SAP HANA platform and mobility and Cloud solutions. It will also focus on developing new solutions for sectors such as telecommunications, utilities, banking, automotive, retail, etc., using SAP solutions. This will further strengthen the relationship between these two companies and would help SAP to address the global requirements for its upstream operations. SAP has shown impressive growth in revenue y/y of ~16% in its 3Q12 which was the highest among its peers. Its stock price has also responded positively with a return of ~37% in the last six months. Looking at its strong future prospects, I expect this trend to continue in the future. 

On the same lines, one of the main competitors of Accenture in technology services, International Business Machines Corporation (NYSE: IBM) also undertook various acquisitions. In the last five years, IBM has invested ~$16 billion in around 30 acquisitions to broaden its portfolio of services. Recently, it completed its acquisition of the HR management company Kenexa for ~$1.3 billion in cash. Via this deal, IBM would enter into the talent management software business and thus gain an additional stream of revenue. Kenexa would provide its support to IBM in recruitment process outsourcing, talent management technology, employee assessment, HR transformation and consulting. On the other hand, Accenture already has a strong presence in the talent management business and it delivers complex solutions using SAP. It provides a complete suite of talent management services in more than 100 countries.

IBM's financial position is also an impressive factor for the company. It has generated ~$3.1 billion in free cash flow in its last quarter which could be used in share buybacks and dividends. IBM's dividends have grown at ~18% annually in the last five years and with its clear focus on growth strategies I expect this trend to continue.

Moving on to Accenture's financial position, it has a pretty remarkable balance sheet with free cash flow of ~$3.9 billion (78% of EBITDA) along with a minimal amount of debt. The company has been successful in growing its free cash flow above its revenue growth because of its good margins and low capital requirements. This has made it very easy for the company to make the acquisitions and still return cash to its shareholders. The stock is currently trading at ~$71 and I believe this is a good entry point for a long-term investment.


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services recommend Accenture Ltd. and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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