TCS merges Japan units with Mitsubishi to create $600m company

Tata Consultancy Services (TCS) today signed an agreement to merge two units in Japan with an arm of Mitsubishi Corporation to form an IT company with expected sales of USD 600 million.

Under the agreement, India's largest software services firm will merge TCS Japan and Nippon TCS Solution Center with IT Frontier Corporation (ITF), the fully owned arm of Mitsubishi. The new company is yet to be named.

TCS will hold a 51 per cent stake and Mitsubishi 49 per cent in the merged entity, which is expected to have an annual turnover of over USD 600 million from the next financial year.

The new entity is expected to be operational from July if approvals are in place and is expected to report revenue of USD 300 over the remaining nine months of the financial year.

"We have decided to combine Nippon TCS Solution Center, TCS Japan and IT Frontier Corporation to create a company of USD 600 million revenue. We expect the deal to close by June, provided that all the regulatory approvals are in place," TCS Managing Director and Chief Executive N Chandrasekaran told reporters here after announcing the deal.

TCS will have 51 per cent in the new company in lieu of the worth of TCS Japan, which is an individual entity, plus a cash payment of USD 50 million, he said. TCS Japan had USD 100 million in revenue last fiscal, he added.

"For TCS it means that our operations in Japan will scale up from USD 100 million to USD 600 million per annum straight away. We will also enhance our local presence significantly because this transaction will add 2,400 professionals besides business associates," he said.

TCS, however, has the option of increasing its stake in the merged firm, Chandrasekaran said.

"In terms of hiking the stake, we have the option to increase it over a period of time, initially to 66 per cent and then further," he said.

"But currently our focus is to build a very strong company and have an aspiration to build a very large IT services company in Japan," Chandrasekaran added.

Prior to the merger, both TCS Japan and the Mitsubishi arm operated as separate companies with USD 100 million and USD 250 million revenue per annum, respectively.With this transaction, we will have the necessary scale, a strong delivery model, a number of key clients and a financial model that will help us to accelerate our growth," Chandrasekaran said.

Mitsubishi will be a strategic client for TCS with revenue of over USD 250 million, he said."This strategic transaction signifies our serious commitment to the Japan market. TCS will now have the scale, strong local presence and our full range of global capabilities to serve the Japanese corporations effectively and accelerate our growth in Japan market," Chandrasekaran said.

For Japanese multinationals, it is a major opportunity because TCS will bring its global expertise, domain knowledge and global delivery footprints in serving them with all its full-service scalability, not only in Japan but also to help them in their global aspirations, Chandrasekaran said.