Acquisition Pays

After being hit by the
financial crisis, several companies in the Indian economy and
globally too, failed to find their feet in the merger and acquisition
(M&A) market. And, with this, the Indian IT industry, being
heavily dependent on the US market for its sales, was the worst
sufferer of the slowdown. Domestic financing for M&As also became
thin with the corporate debt market barely existing. But, the
environment for M&As was never doomed. And, mergers and
acquisitions are back after a two-year slack, with the value of
inbound and outbound deals rising several times. When one thinks of
mergers and acquisitions in India, it is cross-border deals that
first comes to mind, be it Tata Steel's acquisition of Corus, or
Vodafone's stake buy in Hutch-Essar. However, this slowdown has
also given the impetus to the Indian businesses to refocus their
attention locally. Thus, today, not only the M&As continue
amongst the tier-1 vendors in the Indian IT arena, the IT channel
partners are also in full swing for the M&A mania.

“This crisis has been a
test of the excellence of management in several companies and the
results of this can be evident as we go along. Those who were capable
enough to read the signs that it was the right time for the channel
partners to start working on a merger or an acquisition, were better
prepared, while the others were caught snoozing,” explained Ajay
Sawant, MD of Mumbai-based Orient Technologies. Further commenting on
similar lines, several IT channel partners opine that drivers
prominently included the margin pressures caused by the managed
services model and big-bang mergers among high-tech vendors in India.

Speaking on this, Nitin
Shah, CMD, Allied Digital Services explained, “After witnessing a
slowdown, a wave of merger and acquisition activity has been sweeping
the IT services channel. In the present age competitive business
scenario, we have to get adapted to the changing market dynamics to
have a scalable business growth and to provide the required momentum
to the group.” Holding onto its convictions, Allied Digital has
managed to generate a revenue of total $ 42 mn from acquisitions
during the fiscal year 2009-10. Shah confidently said, “Until date,
we have acquired 2 companies. In 2008, we acquired 51.05% stake in
Digicomp Complete Solutions to grow in the hardware repair services
market. It was a very small deal worth about Rs 120 or $ 3 mn. We are
very happy with that company as it has shown almost 100% growth in
2010.”

And, seeing the benefits
of M&A in the difficult times, it has emerged as the main
solution for many companies to come out of that phase. Not only that,
this exercise helped smaller companies to be the partner in the
growth of larger organizations, whereas for larger companies, it was
the option to enrich their presence among consumers. “For the
smaller channel partners, merger and acquisition has always been the
right radar to grow and be a part of a larger organization. With the
merger and acquisition deals, it has now become easier for solution
providers to raise capital in the market, to enhance skill set of the
employees and augment the company's capacity by bringing in more
compliment capabilities. Further, with M&As, employees get to
learn to work in a synergic work environment,” said Naresh Desai,
GM, Avnet Technology Solutions India.

Adding to that, Suresh
Pansari, MD, Rashi Peripherals affirmed, “There are various
benefits of these exercise such as immediate available opportunities,
waiting period is zero, initial effort/cost/investments are
marginal.” Also, while considering acquisitions, the big companies
look for jump-starts. Bigger companies acquire a smaller one doing a
relevant or complimenting kind of business, and build it up from
there. Further, Shah explained, "This is especially true of the
knowledge-based industry. Companies look to reduce costs and maintain
a better EVA. Towards that end, they consider M&As."

Also, several channel
partners with their well-laid out business strategies became
successful in convincing the vendors to close their deals. According
to HP India, solution providers have struck several M&A deals in
the right time. And, with this initiative, it is imperative that the
channel partners should expand their business to newer geographies,
add new technology skill-sets, target new customer segments. And, the
M&A turns out be the right corporate solution, which can help the
channel partners achieve their goals effectively.

Atul Hemani, MD, Omnitech
InfoSolution said, "The scale of opportunities is so huge that
channel companies have to look at inorganic growth strategies to tap
them. Acute lack of skill sets may also become an enabler for M&As
as many companies think its better to acquire skill sets than hire,
train and retain." Also, Orient Technologies had partnered with
Sify to enhance value of their products and services portfolio to
SMEs and other large corporate customers. Based on needs of the
customers, Orient provides the most relevant offerings from Sify that
ensures business benefits for the systems integrator. “We have a
trained team, which focuses only on Sify offerings. We are looking at
offerings from Sify like 'FORUM' for customers using SAP and
e-Learning Services to help them reduce their costs. We are also
looking at displacing existing ISPs with more aggressive Sify
offerings,” said Sawant.

Over the past few years,
the reasons for M&A have taken many folds of change. For example,
most Indian software companies sit on huge cash reserves and use them
to acquire multiple foreign companies for strategic reasons like
access to overseas markets, niche vertical markets and acquiring
domain expertise and capabilities. And, given the pressure to report
q-o-q growth in revenues and earnings; many companies look at
inorganic growth through M&A to deliver revenue and earning.
Gaining access to main markets and customers, building delivery
capabilities and domain expertise, expanding business into a new
geographical area or enhancing a particular type of business
expertise, have driven several companies for M&As. This M&A
trend is spilling over to channel communities in India. Off- late,
private equity firms or larger system integrators are investing in
established partner organizations. Over the past 3 years, Avnet
acquired Ontrack Solutions, Momentum Infocare was acquired by
printing and imaging solution provider Ricoh and lately KPIT Cummins
invested 50% stake in SYSTIME, a 100% subsidiary of CMS group. Shah
opined, "If one evaluates M&As around the world across
different verticals there are essentially 3 drivers. One is to enter
a new geography; second is to acquire skill sets and service
capabilities to address new customer segments; and third is to attain
financial stature to achieve economies of scale, consolidate costs,
etc."

Apart from all these
factors, the launch of the initial public offering (IPO) is also
being considered as one of the main reasons for mergers and
acquisitions. There are many channel companies, who have been growing
at over 50% y-o-y for the last couple of years. Many are looking at
ways to grow inorganically and are seriously considering options like
IPO, M&A and strategic investments. The last 2 years have also
witnessed a few leading channel companies coming out with IPOs to
fund their inorganic expansion plans. While Tulip IT raised Rs 108
crore, Redington raised Rs 150 crore. Accel Frontline, and Paradyne
Infotech raised Rs 42 crore and Rs 14 crore, respectively.

In all these, a whopping
Rs 314 crore was raised by these 4 companies. Post-listing their
stock prices continue to do well. The Tulip stock, which was offered
at an IPO price of Rs 120 per share, is currently trading around at
Rs 600. Analysts believe that successful listings by these companies
are bound to provide strong visibility to the segment. With such
favorable market conditions, more system integrators are likely to
hit the market soon, who has long been planning to raise funds.

Shah said, "We have
been toying with various inorganic growth ideas. We explored the
option of bringing in a strategic investor and in fact had serious
negotiations with an entity, but the talks failed in the final stage
due to certain critical differences. Finally it was M&A, which
helped us to come up with an IPO."

Experts believe that
listing of large companies will prove beneficial for smaller solution
providers as well. "Many private equity and venture capital
funds would look at investing in smaller companies that have the
potential to go public within the next 3-4 years," said a stock
analyst. This could lead to a spate of M&As, and increase in
private and strategic investment activities in channel companies.
Already there seems to be a strong undercurrent building up for M&A
activities in the channels.

Saurin Shah, CEO, Ashtech
Infotech said, "Many companies are realizing that organic growth
can only take you a bit far. And to grow beyond that, they need to
look at M&A for inorganic growth. I expect a lot of action on
this front." He also admitted that his company too is looking at
M&A as one of the options to grow inorganically. "We are
open to M&A and in the process, have sent proposals to a few
companies already," he added.

Experts do not rule out
the foreign hand in M&As going forward. In distribution, the
foreign angle seems a strong possibility. In the recent times, Rashi
Peripherals have also received several calls from investors for
either buy-out or strategic investments. Speaking about his company's
strategies, "We have received many calls from investment bankers
probably acting on behalf of their clients. Most have been MNC IT
distributors, but a couple of them have also come from MNC consumer
durable distributors,"said Pansari.

However, experts believe
that the number of M&A deals across the country currently is much
lower as compared to the activity in the boom years of 1998-2000.
“Today, merger mania may not be in full swing, but, with the
increasing realization that India is not the only low-cost
destination for outsourcing, several IT channel partners have moved
forward and are open to being result-oriented than cost-driven, thus
taking on a partnership model rather than just a client-vendor
relationship model,” said a confident Sawant. Further, it is not
only Sawant, several other solution providers opined that mergers and
acquisitions will certainly rise in order to suffice to the growing
needs of the Indian market. And, undoubtedly, the IT channel will
sustain its growth momentum inorganically.