|
|
            
|
NEW ECONOMY: ACQUISITIONS Now, Part Two The first round of Software India's overseas buyouts marked a modest start. Making their debuts in the second round are all the industry bigwigs. Expect the deals to be bigger, better and, yes, harder to pull off. By Ashutosh Sinha
Although CTP was going for a song-its market value had grease-poled to $212 million from $16 billion in the last one year-the deal fell through. Apparently, price was the factor. Says S. Gopalakrishnan, Deputy Managing Director, Infosys, who also heads its acquisitions team: ''We have looked at various companies in the past, and have also turned some down.'' But even as Nilekani winged his way back home from Cambridge, Indian software companies were busy snapping up small foreign firms (both listed and unlisted). What's surprising about the industry's maiden round of M&As is the size of the predators: they were not the tier one titans like Infosys, Wipro, Tata Consulting Services, or Satyam Computers. Rather they were small, but ambitious, start-ups like the Chennai-based SSI, DSQ Software, Silver Technologies, Pentamedia Graphics, and a whole host of other mom-and-pop coders you didn't know existed. The reason? Smaller firms had a greater need to establish a beachhead abroad than their bigger rivals. Here Come The Big Ones Having missed the first round of pickings, the top guns are loading up to shoot down some big targets. Says Govind Singhal, Executive Director, Polaris Software: ''I think this is the right time for acquisitions.'' Indeed. The meltdown on NASDAQ has sent it stocks tumbling. Companies like Sciant (an e-consulting firm) or MarchFirst (a hard-nosed telecom software player) are quoting a market value of $271 million and $465 million-one-fourtieth and one-seventeenth of their 52-week highs, respectively. There are a number of such companies, both public and private (See Through The Eagle's Eye), that BT believes could become possible targets. Says V. Chandrashekhar, CEO, Pentamedia Graphics: ''We are looking at deals between $30 and $50 million.''
The best way to beat that is to tap the customer at the high level, say, offering systems integration and consulting, along with system architecting and programming. That will keep the offshore model well oiled. Points out Manish Kejriwal of McKinsey India: ''The operating performance of the US businesses can be dramatically increased by hiking the off-shore component of their work.'' The quickest way to hop up the value chain is to make acquisitions. But here again, Round Two is going to be different from Round One in several ways. The pioneers of last year were companies that were relatively small in size and with limited business focus. Therefore, their primary objective was to find a window to bigger markets. KLG Systel, which acquired the US-based Engineering Physics Software for $11.5 million in January, 2000, gave it new clients in markets like petrochemicals and engineering industries. Similarly, Mascon (it acquired International Software Consult, and Pondarosa Technologies) and Maars Software (snagged customised software solutions provider Technical Direct, and Belgium company Benelux) got a toe-hold in the European market, and a stronger presence in telecom market in the US. In fact, a review of the acquisitions done so far reveals that the buyers were far more keen in acquiring marketing competence than either a product/brand or domain expertise. ''Acquiring marketing competencies is important since that is where Indian companies have lacked in the past,'' says Arjun Sethi of A.T. Kearney.
Some others, like HCL Technologies, want to continue with their image of an offshore technology developer. Says Shiv Nadar, Chairman, HCL Technologies: ''We will acquire only those companies that can serve as a front-end for our offshore services.'' Almost two-thirds of HCL Technologies' revenues last year came from offshore services, and in the coming years it wants to focus on internet and wireless technologies. Therefore, Razorfish-which provides solutions built around different protocols and standards-could be a potential target. Says Sunil Gulati, MD, Bank of America: ''An acquisition should help the Indian company either expand client base, get vertical expertise, or acquire technology.'' Without doubt, the choice of targets would be tailored to the short-term and long-term goals of the acquirer. Satyam Computers, for instance, says that it is looking for a niche technology because it will help target clients in a vertical segment. Whereas an ERP company like Ramco Systems is keen on broadening its competence to cover segments like Customer Relationship Management (CRM). ICICI Infotech has just bagged Command System for $40 million (it had previously acquired Ivory Consulting and Object Xperts, both e-consulting firms). Polaris Software, on the other hand, is scouting for companies with domain expertise in banking and financial services. Says Govind Singhal, Executive Director, Polaris: ''Our target would be a company that has a good client base and work that can be done offshore.'' Caveat
Then, there is the issue of managing the acquisition. The Polaris-Data Inc. deal turned ugly (they are fighting a court battle), apparently because due diligence had not been done properly. One of the reasons why Infosys walked away from the Cambridge Technology Partners offer was cultural mismatch. What that drives home is the difference between acquisitions in the manufacturing and software industries. While the incentive in manufacture-related M&As is assets and brands, in software it is intellectual capital. Indian software majors have grown organically and therefore have little experience in managing acquisitions. Building those capabilities in an industry where growth comes from snapping up innovative start-ups (Cisco made 23 acquisitions in 2000 alone) is critical for long-term edge. Agrees Satish Jha, Chairman, James Martin India: ''The real advantage will accrue when Indian companies look at a 5-7 year perspective and figure out what fits them the best.'' The real danger, however, lies in Round Two not happening. For, what's at stake is not the future of a few companies, but that of India as a software nation.
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Issue Contents Write to us Subscriptions Syndication INDIA TODAY | INDIA TODAY PLUS | COMPUTERS TODAY © Living Media India Ltd |
 |
 |
Mid last
year, Nandan Nilekani caught a flight out of Bangalore to Cambridge,
Massachusetts. Seated across the aisle from his J-class seat on board was
Rahul Chawla, CEO of Cambridge Technology Partners (India), a fully-owned
subsidiary of the US-based internet consulting firm. Nilekani, the
45-year-old Managing Director of software giant Infosys, and Chawla were
good friends not just because they were in the same industry. But neither
of them was about to tell the other what his destination or mission in the
US was. So, Chawla was a little more than surprised when Nilekani walked
into CTP's headquarters in Cambridge. Chawla had known for sometime that
the beleaguered CTP was scouting for a buyer, but he hadn't expected
Infosys-despite its No. 1 position in India-to be a serious bidder.
What's more compelling than the economics of
such deal-making is the strategic imperative. Despite its huge success,
the Indian software industry is stuck in the lower end of the value chain.
Well over two-thirds of its $8 billion export revenues come from time and
material (T&M) contracts. Profit margins in this kind of grunt work
are low simply because almost anybody with a few computers and bunch of
programmers can do T&M jobs. Even large companies like Infosys and
Wipro derive over 60 per cent of their topline from plain programming. But
since there are virtually no entry barriers in this segment, and also
because these companies create no intellectual property, profit margins
will increasingly come under pressure in the future.
When
Infosys, Wipro or Satyam go shopping,
market access will still be on their list. But it won't be on top. Says
Gopalakrishnan of Infosys: ''We are actively looking for three kinds of
acquisitions: one, that can help accelerate our entry into newer markets;
two, give us an edge in a 'vertical' industry and, three, add to the
services we offer...say, consulting.'' Market rumours suggest that Infosys
could be looking at Sapient, a 10-year-old internet consulting firm based
in Massachusetts. Gopalakrishnan, however, wouldn't confirm or deny the
rumours. Wipro, too, is reported to be eyeing Diamond Technology Partners
(a consulting company) to improve its billing rates and shed the image of
an offshore development company. Notes Rajeev Gupta, Head of M&A at
DSP Merrill Lynch: ''A high-end consulting arm would bring Indian
companies in the CIO's gaze.''
Don't be surprised if all this talk
translates into very little deal-making. The currency-stocks-that
typically fuels M&As in the IT industry has lost a lot of its value.
The M&As that happened so far were cash-based. That may not be
possible in larger deals involving outflows of $200-500 million. Sure,
Infosys, Sify, and Wipro are all listed on the American bourses, and a
clutch of others (Polaris, HCL Tech, and Satyam Computers) are planning a
listing, but the stockmarket crash has hurt Indian software majors too.
For instance, the Infosys ADR is quoting $253 off its 52-week high at
around $122; ditto Wipro and Sify. Says Rahul Chawla of Orbit-e
consulting: ''The ideal deal should be a substantial part of stock and
some cash since the risk is then shared with the aquiree company.''