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.

Infosys, a more conservative player, has bought Expert Information Services, to strengthen its presence in Australia while TCS picked up Comicron in Chile, South America. Having said this, by far the most often encountered motivation is competence building. Wipro's acquisition of Spectramind, Nerve Wire and, more recently, Quantech are all related to acquiring competition to augment strengths. Zensar's acquisition of Hyderabad based OBT Global is yet another example where the company strengthened its SAP skills through this move.

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.

In one case of a US based consulting firm acquiring an emerging IT services company, the synergies were theoretically good; the two companies addressed different geographies, one was strong in consulting and the other had a well honed offshore delivery model. However, since the consulting company paid little attention to the real issues to be addressed post acquisition, the employee morale dipped and the 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.

Talking of marketing integration, it is also necessary to set practical expectations. In another case of a multinational company acquiring an Indian company for extending its delivery model offshore, the management's expectations on how soon the acquisition would yield benefits for higher growth in bottom-line were unrealistic. Change in business model needs to be preceded by change in mind-sets and this is an important task of post merger integration. As we know, this cannot be done overnight, and therefore it is prudent to put in place a series of measures to prove value and change views. If this approach is not taken, it leads to dissatisfaction and doubts.

The level of integration needed between the companies also decides the post merger integration strategy. There are many cases where the acquired company keeps its original identity and more or less continues to work independently. Suffice to say that these situations are easier to handle.

Having spoken about the need for a clear post merger integration plan, let us now examine the main ingredients of one.

Post merger integration - The ingredients

Strategy and Structure is probably conceptually the easiest but the most critical part, which has a bearing on the rest of the integration. However, if the acquisition does not have the total management buy-in, it may be a problem area too. Some of the key elements of this are leadership consolidation, vision and business philosophy alignment, cultural alignment, consolidation of business reporting and organization structure definition.

Market integration is a more involved exercise and encompasses issues across a broad spectrum - Brand integration (visual and messaging), sales force integration and retraining, product and service integration, channel integration and supplier integration. If done well, this is one area that could lead to tremendous synergies, and even not so obvious cost benefits.

People integration, the most sensitive area, comprises compensation rationalization, creation and deployment of a communication plan, devising employee retention mechanisms as well as employee feedback processes.

Last, we have delivery or operational integration - this would include process and system alignment, technology integration, consolidation of support functions and workplace branding.

While chalking out a post merger integration plan, it is a good idea to identify a team comprising members from both organizations to anchor the initiative. Needless to say, the top management should visibly support the initiative: it is useful but not compulsory to have external help.

It is also practical to be aware of typical challenges:

• Maintaining day-to-day business continuity
• Overcoming cultural differences-including management style, company structure, employee mind-set
• Delivering the needed integration synergies in the first year and deliver sustainable synergy benefits over the long-term
• Creating and maintaining effective employee communication

And address these effectively through the plan.

Finally, here are some pointers to a successful integration:

• Quick and speedy integration
• Swift leadership consolidation Unambiguous and continuous communication to stakeholders
• Setting up an empowered and small integration team
• Top management commitment and involvement
• Detailed plan with milestones and metrics to evaluate success
• Identifying quick wins and displaying success

In times to come, we will see more and more companies entering interesting partnerships - some would go all the way, others may have strategic, but more loosely coupled relationships- the above approach would help in all such scenarios.