India's software services firm Tata Consultancy Services is not pursuing the acquisition of Lufthansa's IT arm actively anymore on concerns of profitability and hassles of reaching an agreement with the airline's labour union, at least three people familiar with the discussions said.
European companies such as Lufthansa, who already outsource their IT services work to vendors including TCS and NIIT Technologies, are under pressure to shed non-core assets. For Indian tech firms seeking to grow their business beyond the top market US, such transactions promise to bring sustained revenues with local staff.
However, European labour laws, aimed at protecting local jobs, make it tough to relocate existing projects to cheaper delivery locations such as India. "It's a marriage mostly seen as win-lose here in Europe, especially with the danger of most work getting shipped offzshore," said a senior official at one of the Indian tech services firms based in Europe.
His company was among bidders looking to acquire a stake in Lufthansa Systems.Another person also based in Europe and familiar with early talks between TCS and Lufthansa said the two companies could still rework a transaction based on renewed structure. "Instead of a complete buyout, a joint venture with TCS can be among possibilities," he added. Lufthansa Systems, the IT arm of Europe's second biggest airline had 2010 revenues of 4,105 core (almost $780 million) with some 3000 staff and counts its parent apart from several other airline companies among top customers. In August this year, Lufthansa had confirmed reports of restructuring its IT unit including plans to seek a partner.
"I have heard rumours about talks between Lufthansa and TCS. Of course we will take care of our colleagues and no one will be left alone. We are always concerned about job losses in acquisitions as this is usually passed off as synergy effect but these people are highly trained and skilled individuals and any job loss is absolutely unacceptable," said Arne von Spreckelsen, a spokesperson for the Lufthansa trade union with some 2.2 million members.
When contacted, a TCS spokesman said his company does not comment on market speculation. Lufthansa Systems officials had not responded to an email query sent by ET on Monday. TCS was not the only bidder in race to acquire Lufthansa Systems; rival Wipro, apart from several European outsourcing firms have had dialogues with the airline over past two years. A successful acquirer will get the expertise to target nearly $10 billion global airline IT market. Experts say labor troubles would continue to derail any large acquisition bids by Indian tech firms in Europe.
"European labor issues are a structural impediment to acquisitions of larger firms by offshore firms which is precisely why none have happened so far," said Peter Schumacher, Chief executive of European think-tank Value Leadership. "These issues cut across Europe, as the recent strike by more than 400 Danish employees of CSC shows," chumacher added.
Under pressure to shed non core business assets, European outsourcing customers such as Lufthansa are also being asked by the labor union to raise wages. "We have asked Lufthansa group companies for a 6.1% compensation hike for their employees, this includes Lufthansa Systems. We will start negotiations on January 13th and we are confident that we can arrive at a conclusion on good terms as what we are asking for is fair," Spreckelsen said.
Over the past three years, tech firms including Wipro, Infosys, Patni and several others have had discussions with potential targets such as Globant of Argentina, Ciber in the US and IDS Scheer of Germany. While Software AG acquired IDS Scheer earlier this year, both Globant and Ciber decided to discontinue their dialogues with potential acquirers. In 2008, Infosys made a $753-million offer for UK-based SAP aggregator Axon. However, it backed out when domestic rival HCL made a competing bid, bettering Infosys' original 600-pence offer, and finally completed the acquisition.
Source: The Economic Times