Consolidation time?

With the exposure to the financial downturn increasing for the companies that
are in IT services and solutions space, it is increasingly becoming difficult
for these companies to maintain their growth. New entrants in the market aren't
the only ones who are worried about their future but established players too are
finding it difficult to post year-over-year growth in their balance sheets.

During any downturn, IT expenses are the first to be axed by companies across
all verticals due to the increasing financial crunch. At the same time, there
are customers looking for more services for the existing cost.

Therefore, the question before most solution providers is how to survive in
absence of organic growth? This turns the discussion towards options like
growing inorganically, which is generally referred as consolidation. This means
mergers with, or acquisitions of smaller companies in the race to survive.

Right Time?

One question that pops up, when we talk about consolidation is whether this
point of downtime is a healthy period to opt for it. The solution industry saw
few instances of business consolidation in terms of M&As in the past six months,
partially as people looked inwards in a bid to control costs and remain
profitable.

But there are those who bucked the trend. Chandan Joshi of Pune-based Phoebus
Technologies feels that slowdown is the best time to go for consolidation. His
company merged with Pune-based Vintech Electronic Systems some months ago. “We
opted to merge especially at this point of time considering the significance of
the operational costs of both the companies and providing complete solution to
the customers,” Joshi said.

Consolidating with other companies to offer wider technical options to
customers is sensible. Especially if the other company has an existing set of
technical people in their team, which nullifies the need for further investment
on training . Nitin Shah of Allied Digital Services too strongly recommends
consolidation during slowdown to meet customer expectations.

Allied Digital too acquired 100% stake in Bangalore-based SAP Consulting and
Support Services Provider En Pointe Technologies India sometime ago. “This
acquisition would help us to complete a vision of total end-to-end services for
remote data center support including business applications,” Shah averred.

Joining to grow

Another merger that raised the eyebrows during the time of slowdown was the
joint venture floated between Pune-based Sunfire Technologies and Concept
Information Technologies under the name of Green IT Solutions, which would act
as the company's vehicle in expanding the business across the country.

Sanjay Kulkarni, CEO, Sunfire Technologies claimed that the complementary
solutions that existed between both the companies made this merger possible.
“Sunfire is strong in virtualization, networking and datacenter solutions, and
has a strong customer base in ITes and manufacturing, while Concept is
specialized in HPC and storage solutions for different verticals ranging up to
defense verticals.

The only way, one can offer end-to-end solutions is through consolidation, as possessing all type of solutions in a dynamic environment is not possible Nitin Shah Allied Digital Services Mumbai	Unless there is some unique or appropriate solution available, and there is enough cash flow, nobody will go for consolidation RS Shanbhag Value Point Systems Bengaluru

The merger has given us a comprehensive technical skill-set and a broader
customer base,” Kulkarni claimed.

For V Murali, CEO, Precision Infomatics, slowdown is an opportunity for
companies to consolidate their business. “Not in a position to expand their
operations, they would be restricted to limited exposures. In this scenario, it
makes sense for the companies to go for consolidation in their business through
which they can find new opportunities,” he said.

During a slack market with less projects floating in the market, the
available time can be utilized in freezing business strategies, including M&As.

Cash flow counts

On the other hand, RS Shanbhag, CMD, Value Point Systems, Benguluru is
surprised to hear about the number of consolida-tions happening across the
solution provider community.

However, he felt that if there is definite requirement and availability of an
appropriate solution, then it is the right time to go in for consolidation for a
company that has good cash flows. According to him, the valuation of the company
plays a vital role in the acquisition.

Today, even if a company is ready to buy, the other company's due diligence
on their value is preventing the consolidation from taking place. “A year back,
the valuation of the companies ranged from 7 to 9x of EBITDA which has today
come down to 2.5 to 3.5x of EBITDA,” Shanbhag pointed out.

Other options

Should a solution provider consolidate his business by acquiring new skill
sets and filling his product portfolio gap or should he rather develop on his
own? Murali completely disagrees with the thought.

He claims that business consolidation is the best way to acquire new
technical skill sets and enhance the existing product portfolio.

“Indigenous development is a lengthy process. By the time one completes the
process, some other competitor would have established himself in the market.
Moreover, investment in people, property and processes could be really high and
suddenly if a resource quits after focused training, the whole process could be
stalled. So it is always better to go for business consolidation rather than
building the skill sets indigenously,” Murali opined.

Nitin Shah echoes Murali's thoughts on need for consolidation. “This is a
fast industry and the clients' requirements have to be met immediately. It will
take a huge amount of time for a company to build its own solution and by that
time the opportunities may be lost. Losing opportunities in slowdown can't be
ideal,” claimed Shah.

However, Sairam Mudaliar, CEO, Pentagon Systems, Mumbai felt that only cash
rich companies can go for acquisition of complementary technologies and the
others need to build them on their own. “It makes sense to build in your own
solutions rather than go for technologies that are built by some other company.
At this point of downtime, when cash is highly important for any company to
survive, one should try to build one's own team and skill sets rather than
invest in some solution whose future is not known,” he averred.

Who should consolidate?

It is advocated that those companies that have good cash resources and are
looking for deep penetration among the customers should opt for consolidation.
Apart from these, companies that are struggling for their survival should
consolidate their business with another that is fundamentally strong, cash rich
and has a good customer base.

Chandan Joshi of Phoebus Technologies felt that companies that are finding
day-to-day survival difficult to handle must strictly go for consolidating their
business by getting acquired. “Instead of losing the technical resources that
the company has built with so much effort, it can opt for consolidation through
M&A,” Joshi said.

Vivek Mahajan, INS E-Solutions mooted a courtship period for the two
companies that decide to merge. “There should be the right synergy and the
valuation has to be considered. Their cultures have to be matched to avoid
clashes in the future.”

Dharmesh Anjaria of Dynacons Systems and Solutions, Mumbai said, “those who
are looking out for specific geographic expansions must utilize this opportunity
by acquiring the companies of their specific areas of interest,” Anjaria
explained. Dynacons too is looking to acquire companies in the services and
security space.

Considerations

To make any alliance work, both companies that are merging together must
have clarity on the objective of their merger preferably in the immediate
future. Atul Bansal, MD of Silicon Integrix, New Delhi agreed that the objective
should be the main driving force behind the decision to consolidate.

“If the objective of acquisition is market consolidation then SPs should wait
till the market is back to positive growth. This would help them in meeting
their objective profitably. On the other hand, if the objective is just to merge
and acquire then it can be done any time and one need not wait for the market to
perform better.”

Shah of Allied Digital felt that the focus of the companies must stay in
their core areas and any deviation in that respect wouldn not allow the
companies to reap the benefits of consolidation. Anjaria of Dynacons Systems and
Solutions also pointed out that the focus of customers must be decided before
merging the two companies.

Shanbhag on the other hand, pointed out that both the companies should go for
consoli­dation, only if they see any inherent value in each other and must be
very conservative in liquidating cash in the M&A.

With majority of the solution providers scouting for right kind of solutions
in order to fill the gap existing in their solution portfolio and add value to
their services, small companies, who are strugg­ling to survive with inherent
values and strong skill sets can look forward to consolidate their business with
them for mutual growth and providing end-to-end solutions to their customers.

NR Sethuraman

Sethuramannr@cybermedia.co.in

with inputs from Amrita Tejasvin