Republished with permission from Business Line

A recent Forrester report predicts a major shake out in the offshore IT industry and recommends that even large players align with each other to prepare for a maturing market. They predict consolidation, not just at the small company level, but among companies of all sizes. We have recently witnessed the acquiring of Mphasis by EDS, one of the more significant deals in the offshore space. In an industry that is seeing consolidation at various levels, it is relevant to examine both the motives behind this trend, and more importantly, look at what it takes to create a successfully merged entity.

M&A Drivers

It is important to understand the causes that motivate mergers and acquisitions, as they drive, to a great extent, the method of integration. Broadly speaking, M&A drivers could be for customer acquisition and top line growth, new market entry, competence building or to make a significant change to the business model. Scandent is an example of a company that has grown aggressively over the last two years by almost single-mindedly following an acquisition strategy. Intelenet, a joint venture of HDFC and Barclays, has similarly resorted to inorganic growth to create a significant presence in the domestic market.

An example of a takeover for change in business model is Valtech’s acquisition of Majoris and the EDS take over of Mphasis. These companies have used acquisition as a strategy to bring about a quick change in their existing business or delivery models. A contrasting example is one of Indecomm Global Services, a fast growing provider of transaction processing services, acquiring Mortgage Dynamics, a leading US based mortgage consulting firm. This acquisition would allow Indecomm to globalize its business model and offer a more sophisticated set of services to its clients.

Thus, clearly, there are many reasons for a buyer to seek out companies to acquire- on the flip side- companies sell out either for size and scale benefits, or simply for survival.

Common Pitfalls to avoid

While most of the attention of observers and analysts, and sometimes even the management, is on evaluating companies for M&As and assigning a value to the deal, few companies pay equal importance to integrating the merged companies. Widely researched statistics show that less than 20% of takeovers globally have yielded superior results to shareholders. That’s not all, we have seen many examples in the industry where M&As lead to confusion at an employee level, ambiguous go to market strategies and often, lowered customer satisfaction.

company has seen plenty of churn at all levels in the India operations. This has undermined the utility of the deal.

Importance of a post-merger integration plan

In our view, there are four important areas where integration efforts need to be focused- alignment of values and vision, especially among management, a unified go to market strategy, people integration and operations integration- the relative importance of each would be determined by the level of integration being considered. Often, highly simplistic approaches are taken- for instance; compensation rationalization is equated with HR integration, while merging websites and printing new business cards and signage are thought to be sufficient at a marketing level.