"Guzder should consider selling Hand Tech to a buyer who is willing to invest in building the company'' Padmaja Alaganandan, Principal Consultant, Pricewaterhouse Coopers

What should Guzder do-spin off Hand Tech or retain it as a division? There are several considerations that will shape this decision. Here are some of them:

Can Hand Tech maintain a sustainable market position without additional investment? No. Without product development and marketing investments, Hand Tech's first-mover advantage cannot be expected to hold for long. Continuing to retain it as a division starved of resources is not going to yield TelECom's shareholders any value.

Does Hand Tech fit in with TelECom's overall business strategy? Basu did reassure Balakrishnan that Hand Tech was integral to TelECom's acquisition of Prime Gadgets. However, this is not borne out by Guzder's subsequent discussions with Balakrishnan, where from the tone of his conversation he indicates that Hand Tech is expected to ''manage''-hardly a reasonable stance from a company looking at developing a presence in the consumer electronics segment.

Hand Tech clearly has good business potential. If this business is not core to TelECom's overall strategy, Guzder should look at cashing in on his investment and consider selling this division to a buyer who sees potential and is willing to invest in building the company.

Can TelECom provide the necessary funds for Hand Tech? If the necessary cash infusion can be made, then the way ahead is quite clear for Guzder-he has the chance to achieve his company's objective of being a player in the consumer electronics business.

The key question in this context is-will Hand Tech generate more value for TelECom's shareholders as a division, or as a separate business entity? It is not just the need for external funding that should drive this decision. A typical question could be what are the synergies between TelECom's hardware business and Hand Tech's consumer electronics business?

As investors in an entity with potential, Guzder's shareholders will realise more in the long term by spinning of Hand Tech than retaining it as TelECom's fund-starved division.

"The ultimate solution needs to balance the benefits of association with a big player with an effort-reward equation" Sanjay Jain, Associate Director, Rabo India Finance

Despite having taken apparently irreconcilable stances, both parties agree that Hand Tech has some value. An answer to the question of spin-off or not has to emerge from a dispassionate analysis of relative capabilities and aspirations of both parties to arrive at a win-win position. Two questions need to be addressed :

• Can TelECom foster intrepreneurs and innovation? Innovation is critical for technological breakthroughs. It implies long-term sponsor commitment and an appetite to bear losses of failed ideas.

It also appears that TelECom would probably be much happier buying a potential new technology or a company with promising products rather than go for long-haul, risky in-house development (as reflected in their purchase of Prime Gadgets for Rs 750 crore). The above strategy-though seemingly opportunistic-may not be unsound as it doesn't load the company with a big R&D budget and allows for higher profits. Much as it may want, TelECom with its current culture is an unreliable parent for Nirupam. Therefore, for a solution, TelECom will have to make compromises.

• Can Nirupam create an independent enterprise without the backing of a major player?

Benign greed can be a significant motivator for pushing beyond the ordinary. It is not unusual for technology companies to hard drive their R&D efforts in the hope of, say, making a lucrative IPO or being acquired by a bigger company.

However, stockmarkets can be temporal as has been demonstrated by so many IPO failures or companies going belly-up just because markets didn't support them at the right time. Bigger companies present a natural investor base for strategic or smaller players and, thus, cannot be totally ignored (even Hand Tech got merged earlier with Prime Gadgets as they needed money).

The ultimate solution, therefore, needs to balance the benefits of association with a big player with a clear effort-reward equation (the prime motivator behind IPO or spin-off argument). It should also remove the insecurities of getting lost in the big ship that telecom is.

A mid-way approach could revolve around the following:

• TelECom continues to have the exclusive intellectual property rights for current Hand Tech products-the handheld computer. TelECom also markets and manufactures these products. All this can be continued in the Hand Tech division, which can be managed by Pradeep Singh (thus ensuring least internal disturbance).

• Spin-off the development part of Hand Tech for future products in to a separate company, which can be a joint venture between TelECom and Balakrishnan's team. To meet the funding needs for the immediate four products in the pipeline, TelECom could provide the seed capital or soft loans. The stakes of Balakrishnan and his team come with executive control. TelECom can protect its interest by having the right of first refusal (albeit at an arm's length consideration) to the future pipeline of products and the new company could reserve the right thereafter to sell to other players. This structure can provide for a win-win partnership.

Over a period of time, the new company can spawn multiple customers and products and can consider making an IPO (which can further dilute TelECom's stake) to provide upsides to all stakeholders. TelECom also protects its interests and buys time to build its capabilities and thus reduce the shock on its market valuations.

"Spinning off Hand Tech will allow Guzder to share risks while maintaining a good share of a growing pie'' Arjun Sethi, Manager, A.T. Kearney

This case highlights some typical errors that occur during M&As-in this case, the one concluded by Homi Guzder and Aloke Basu during the acquisition process.

Intrinsic to the success of any acquisition are a set of key success factors stretching across strategy development right through to post-merger integration (PMI).

Guzder clearly did not have a well-thought-out strategy or an end-game scenario in place. Further, he is not clear about how to integrate Hand Tech, or how to leverage it in his overall portfolio.

So, we have a situation where the future strategy for Hand Technologies is not clear; the options have not been discussed between Guzder and Basu; and, finally a key figure, Balakrishnan, has been kept out of the picture until after the event. A lack of communication leads to uncertainty, poor management of perceptions, and post-acquisition 'pain'-as is the case here.

In spite of all the initial mistakes and little support from Guzder, Balakrishnan has managed to do very well and his product is an instant hit. However, given the background of the acquisition, combined with the fact that competition and market forces will force heavy investments in Hand Tech, which, in turn, will need to be even more innovative in the future to stay in a leadership position, Guzder cannot afford to take the middle path any more.

He has two options:

Option 1:

• Retain Hand Tech as a division.
• Significantly change strategy.
• Invest heavily in Hand Tech.
• Allow Balakrishnan to run the division freely like a 'fractal' set-up .
• This option will be a high-risk one, but with a potential of huge gains.

Option 2:

• Spin off Hand Tech into a separate entity, retaining partial ownership.
• Put in place a management team to support Balakrishnan.

This option may be more viable for Guzder, given his track record during the course of the acquisition and PMI process; his lack of appetite for further investment; and his inclination to tread the middle path.

This option will allow Guzder to share risks while maintaining a share of a growing pie (spun-off entity), rather than have complete control of a division that is bound to shrink unless provided with the kind of support that TelECom is seemingly not in a position to provide.