Talking M&As: (From left to right) HCL Technologies' Vineet Nayar, Gartner Inc.'s Frances Karamouzis, Satyam Computer Services' B. Ramalinga Raju, Norwest Venture Partners' Promod Haque and NASSCOM's Kiran Karnik

NASSCOM 2006, as one industry CEO put it, was the biggest show yet by the software and services association not just from the point of view of the number of players present, but also from the quality standpoint. The annual Business Today-NASSCOM panel discussion focussed on the topic of 'M&A (mergers & acquisitions) in software and services.' The panel was made up of Vineet Nayar, President, HCL Technologies, Frances Karamouzis, Research Director, Gartner Inc., B. Ramalinga Raju, Founder & Chairman, Satyam Computer Services, Promod Haque, Managing Partner, Norwest Venture Partners, and Kiran Karnik, President, NASSCOM. The discussion was moderated by Brian Carvalho, Senior Editor, Business Today. Excerpts:

BUSINESS TODAY: I'll start by throwing up a number-a big number. Some $100 billion (Rs 4,500 crore) worth of outsourcing contracts are expected to come up for renewal in the next two years. One school of thought is that the global Big Six (Accenture, IBM, EDS, CSC, HP and ACS) will be under pressure to hold on to their share as the Indian vendors will stand to benefit from smaller contracts and selective, single process outsourcing. Against that background, how is the M&A scenario going to play out: Will the MNCs be more likely to make a play for Indian IT players, or could we expect to see Indian companies looking outwards for big-ticket acquisitions?

KIRAN KARNIK: The feedback I get is that we are beginning to see a disaggregation of the big deal concept in many cases, although that wouldn't mean a trend towards small deals, but a number of smaller deals rather than just one big deal. I also see a distinct possibility of at least the bigger Indian companies beginning to compete as the prime vendors, not content to just be sub-contractors. Needless to say, you will also see the other trend of big MNCs looking for specialised, readymade vendors, for which they might want to acquire small to mid-sized Indian companies. My expectation is that a little bit of both will happen.

BT: Mr Nayar, would HCL be keen to go abroad and acquire something for scale and size?

"One thing about M&As is that you don't get married to the girl next door just because she is pretty" Vineet Nayar President/ HCL Technologies

VINEET NAYAR: Let's look at two sides of the coin. On the one side, the big Indian companies have so much cash on their balance sheets that I don't think anybody (any of them) will be available for acquisition; it is an unnecessary banter that goes on that one of these big guys can acquire an Indian company. The shareholding patterns of large promoters, the cash on the balance sheet and the market cap of all our (Tier I) companies are so large that I can't see any of them being acquired. The smaller companies are not worth buying, as most of them are body shoppers; unless they are niche companies in specialised spaces in technology, but in the mainline applications space, I don't see any meaning for anybody (from overseas) to acquire anyone right now (in India).

As to acquisitions by Indian companies by going abroad, there is a cautious approach adopted by most of us. The cautious approach is that we are looking for domain capability acquisitions, which is largely to do with the fact that you may need more competencies in areas like life sciences or banking and finance. Or business consulting may be the other way to go in terms of M&As, although I may have my views on whether that's a good way to go about things. At HCL, we have done three things that are different. We have done what we call staged M&As. This means that we have done BOT (build, operate and transfer) models, so therefore companies need not acquire other companies; instead we can build what they want to acquire over a period of time, and they can acquire at market values. We have done joint ventures, with Deutsche Bank and British Telecom (in 2005 HCL completed the buyouts of these JVs), and have been fairly innovative in structuring our deals with these companies. This lends them for participation even as the JVs allowed us to acquire domain capabilities, and become strategic with some very large customers on the basis of which we have been able to expand. We have also done some 100 per cent acquisitions, which we will continue to do, which are smaller in nature, and which have been largely based on either obtaining market access or domain knowledge. That's the direction in which we are going.

"Why should Satyam look at CSC, and inherit a problem that has resulted in declining market caps in US, and higher ones in India?" B. Ramalinga Raju Chairman Satyam Computer

BT: So size and scale are not a priority today for HCL?

NAYAR: I don't think size and scale is a priority right now. One thing about M&As, which is very important, is that you don't get married to the girl next door just because she is pretty. You have to look in terms of the right fit, in terms of what you are capable of. I see a lot of people depending on one acquisition to transform their company. That's a wrong way of looking at it. The right way of looking at it is you should have the capability and appetite to digest the acquisition, and take your systems and processes to that company rather than bring their processes and systems to yours. Wherever M&As succeeded or failed, it has largely had to do with a strategic fit or the lack of it, and the ability to digest and assimilate the acquisition. There is nothing cheap. You may buy something cheap and think it will work, but that doesn't happen. You may buy something thinking it is strategic, but the transformation you expected does not take place. Unless you are very clear in your mind about where it fits and what you are going to do-we were very clear where we were going with Deutsche Bank or British Telecom-M&As are not going to work. HCL is very clear what it wants to acquire and what it does not want to.

BT: Mr Haque, looking at it from an investor point of view, if an Indian company wanted to make a global acquisition, would you be willing to put your money on the table?

PROMOD HAQUE: I think so, but one has to take the precaution to look at the reason for the acquisition, and the ability to assimilate and digest it. Our experience has been mostly on the product side, though over the years, we have done some services-oriented acquisitions, but they have been mostly on the telco side. One we did many years ago was a rollout of internet service providers (ISPs). There the rationale was that those were the early days of the internet and a lot of ISPs were getting created in different parts of the us, some in Europe, and all lacked systems and abilities to do marketing. A central back office, which could integrate all the disparate regional properties was created, which would help with billing, and marketing promotional marketing packages, and that really worked out.

"There are perhaps 1,000 companies that are clones of each other. The choice for them is simple: Either specialise or wind up" K iran Karnik President NASSCOM

BT: Assuming an ACS or a CSC was up for sale-as has been rumoured on occasion-do you think an Indian company should be making a play?

HAQUE: Oh certainly, Indian companies have very high valuations, and if that was the criterion, then yes. But an acquisition also has to meet other things. Most acquisitions fail, as they are ill-conceived, so you have to be careful when you do that. Also, the other conception that mergers of equals never works, as there has to be one dominant culture, otherwise it ends up in total chaos. Look at what happened with hp and Compaq-it's a total disaster!

BT: Frances, maybe you could give us the view from the other side. How eager are the multinationals to acquire?

FRANCES KARAMOUZIS: When mentioning the Big Six, if you are talking about the traditional, heritage, predominantly us-based companies, then we long declared them dead. What you saw two or three years ago was a homogeneous shortlist that may have encompassed one camp versus the Indian companies-well, those days are gone. So, many of the shortlists today are very heterogeneous, from the point of view of deals being won, whether you look at the ABN Amro deal or the General Motors one. The new Top 10 companies in it will include names hailing from other countries than the US. That has clearly taken hold of the market. In terms of the $100-billion (Rs 4,50,000-crore) renewals, there's an element of those that are in BPO (business process outsourcing), an element of those that are in applications, and an element of those that are in infrastructure. In the application space, they (the Indian companies) are very clearly being invited to the dance, as we say. They don't need acquisitions in my mind to play in the application space. The acquisitions that are happening may be to buy capability either in a client base and geographic market, or for competencies and skill sets. So we see targeted acquisitions made in Europe in places to get localised geographical footholds, or to get a 'hunting licence' for a certain client base that companies ordinarily would not have access to. Or they might want to buy some skill sets in the industry. I think some of the companies have been very public about their approach. HCL just shared their approach, Wipro sort of says they will target small acquisitions. So you will see targeted deals. Market caps of Indian companies are so high that it is unlikely they are going to get acquired. You see discussions these days of IBM and Convergys as a potential M&A, or a CSC-HP rumour; if such deals do happen, they will create a level of confusion in the marketplace as acquisitions in the services space are extremely difficult, as what you are buying is one thing, and what you may be getting quite another.

"Acquisitions in the services space are extremely difficult as what you are buying is one thing, and what you may be getting quite another" Frances Karamouzis Research Director Gartner Inc.

BT: Mr. Raju you believe in making small niche acquisitions. You acquired two consulting companies that can't be called large by any standards. Is that the way to go?

RAMALINGA RAJU: It is a very straight- forward approach, to my mind-which is to fill gaps that may exist, with reference to geographies, with reference to competencies, with reference to accessing specialist relationships, and so on. However, acquiring for scale is altogether a different proposition. If you are a much smaller company than we are, then it may have its own appeal. We have given guidance that this financial year we are going to close with 28,000 people. In that sense scale is not an issue. A $500-million-1-billion (Rs 2,250-4,500-crore) deal over five-seven years is still a small proportion of what we could do as a company. Therefore, we are more focussed on niche opportunities, where synergies are very high. The old paradigm has changed. Size can be described in many ways: In terms of market capitalisation, there are as many Indian companies as there are global companies. A CSC with a market cap of $7.5 billion (Rs 33,750 crore) is in that sense much smaller than a few Indian companies. Those equations have changed altogether. With reference to acquiring companies of that kind in the us, it does not make sense. Imagine a manufacturing environment, where a factory was not any longer viable to be operated in the US because the cost pressures are very high. If that work has shifted to China, would it make sense for a Chinese company to acquire a company in the US just because it has that kind of a market capitalisation? The reason the Chinese company has managed to build that market cap is because it doesn't make any sense for the American company to operate in that high-cost environment. So, why should a company like Satyam look at a company like CSC, and inherit a problem that has resulted in declining market capitalisations in the US, and enhancing market caps in India. So, there is no case for such acquisitions. From the people point of view there may be some case, but then again Indian companies are targeting talent that's available in those companies, and such talent is more open today to become a part of a growing company like an HCL or a Satyam or some other Indian company. If you are acquiring a company for people, you inherit two things: High cost and a less energised workforce. That's because in developed countries over a period of time, the approach towards aggressive growth in competencies has come down.

"Most acquisitions fail as they are ill-conceived, so you have to be careful. Mergers of equals never work, as there has to be one dominant culture" Promod Haque Managing Partner Norwest Venture

BT: Mr Karnik, one estimate is that there are 2,000 IT and ITES companies in India. That seems a ridiculously high number. Is there a case for consolidation there? Why don't we see more M&As?

KARNIK: We have about 950 members in NASSCOM, the number of people active in the market may be 1,500, but I would agree with your number of 2,000. If you had 1,500 niche companies doing very specialised work, you might have seen plenty of M&As. But of the 2,000 companies if you have 1,000 companies that are clones of each other, doing similar work, trying to match up to the big service companies, it's not viable. That trend will not survive too long. It's a process that's happening in two directions. One is a transformation towards more specialised areas, like KPOs (knowledge process outsourcing). The second direction is that they will just close down. So, in this space there is no value in M&As, as everybody is doing the same work. By acquiring such a company what is the value being added? You only get people, which you could get anywhere. You aren't getting any specialisation, no management inputs, no systems, no major customers. So, consolidation that many expect in this sector isn't happening because there's simply no value to be added. The choice for these guys is simple: Either specialise or wind up.