Prayag Consulting

Dictated by the market forces, Mergers and Acquisitions are on the agenda of many players in the IT services and IT enabled services space. M&A activity, which until recently, was only in the realm of the bigger players, has now spread over to relatively smaller companies with turnover of around US$ 10 million.

M&A activity is highly correlated to market dynamics. Market drivers in today's scenario include:

Becoming a more broad-based player
Increasing customer base
Globalization - acquiring a local face, or acquiring an offshore back-end
Picking up a good deal
Buying competence in an area

The approach to M&A by companies of differing sizes is quite clearly laid out.

For larger players, an M& A could be part of an overall diversification strategy. For instance, TCS has acquired CMC to strengthen its position in the Indian market, as well as to grow more rapidly. Wipro's acquisition of Spectramind was part of its strategy to enter the BPO space.
For mid-sized companies, there are two motivators. One is to team up with companies in their own niche and develop a strong portfolio of offerings. iVega has been shopping around for companies in the US and Europe to establish a local presence in those geographies, as well as to strengthen its presence in its chosen niche- financial services vertical.
The other option is to acquire a similar sized company and scale up. The merger of Polaris and Orbitech to form a $100M company is the most current example where this theme prevailed.
Smaller players are also seeking out consolidation in order to compete better in a fragmented and crowded space. The acquisitions of Customer Asset and Spectramind are examples that fall into this category.

The Indian software industry has seen relatively few big deals recently, although several small ones have been inked, indicating consolidation at the lower end. This is attributable to the current market dynamics. While the bigger companies showed resilience, it is the smaller companies that have borne the brunt of the slowdown. Going forward, we are likely to see sporadic large deals and many more smaller deals.

Notwithstanding the positives, M&As face many challenges like consuming an incredible amount of resources, legal and tax complications, history of improper execution, and most importantly, problems with merging corporate cultures. Success of mergers has been measured using different metrics and the success rate varies anywhere from 30% to 70% depending on the metrics used, says a recent Gartner report. For instance, using increasing shareholder value as a metric, about 30% created shareholder value and about 31% of M&As reduced it.

Extrapolating from this, the Indian IT industry is not very mature. Hence valuations, due diligence and so on have still not been honed to a fine art. Satyam, for instance, has spent a lot of resources in buying companies but is yet to see any tangible results. Given the skepticism, success rate, or lack of it, and difficult integration issues, we believe that companies would be well-served to adopt a dual strategy of pursuing organic growth vigorously even while contemplating exponential growth through acquisitions.

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