Mergers And Acquisitions: Inorganic Mantra For Success

Whether
it is for sharing technical expertise or expanding into new geographies starts,
mergers and acquisitions are preferred vehicles for solution providers to add
value to their existing business. The IT industry has witnessed some of the
biggest mergers in the past recent months. Will the channel community take a cue
from them?

Tech Pacific's merger with Ingram Micro, Taiwanese major
Synnex acquiring around 36% stakes in Redington India; Rashi Peripherals taking
over Zeta Technologies' agency operations... These stories are not mere
headlines. They are stories indicative of an emerging age of innovation and
survival.

In its attempt to grow and survive in a competitive market,
the channel community has realized that inorganic growth is the need of the
hour. 'Think different' is the mantra for success. In this dynamic times,
even solution providers are not averse to taking over smaller companies or
getting taken over by bigger players or simply aligning themselves with other
organizations.

So, what prompts a merger or an acquisition? What are the
benefits of such an exercise? What are the loopholes to be avoided in the
process? DQ Channels spoke to some of the solution providers to check out.

Why M&As make sense

Given the pressure to report quarter on quarter growth in
revenues and earnings, many companies are looking at inorganic growth through
mergers and acquisitions to deliver revenue and earning growth. Gaining access
to key markets and customers, building delivery capabilities and domain
expertise, expanding business into a new geographical area or enhancing a
particular type of business expertise would further the growth of the company
and are other drivers for M&A.

Giving credence to this is the fact that many Indian software
companies have acquired foreign companies. This way, they have gained access to
overseas markets, specifically to key customers in verticals such as banking and
finance, transportation and telecom.

Industry experts believe that most companies have some gaps
in their solution portfolio. Today's customers are looking for end-to-end
solution providers who can offer an entire gamut of services. M&A therefore,
becomes a preferred vehicle to complete solution portfolios, if they want to
want to retain a customer.

"If there are any unique tools or skill sets in a
particular industry, then companies could consider mergers or acquisitions for
value addition in the niche area. This would help them stay
ahead in the competition for being the best," believes Atul Hemani,
Director, Omnitech InfoSolutions Ltd.

Synergies between the companies and their product/service
offerings, their complementing strengths and market reach of companies in terms
of geographic spread and products/services are some reasons a company would go
in for a merger or acquisition.

Other reasons could be buy-out of a strong brand from a
financially weaker company to gain acceptance in a new space for the acquirer.
The financial health of companies, which can help absorb the cost of acquisition
while looking for long term benefits accruing from better products or
intellectual property is another attractive aspect.

The need to balance the portfolio of product/service
offerings and hence be better prepared for industries, which have cyclical
demand for products and an increase in market capitalization and consequently
shareholder value for listed companies are other reasons why companies would go
in for M&A.

Merger and acquisition: The difference

A merger normally takes place between two equal sized
companies looking to work together, rather than compete with each other in areas
of technical expertise and the targeted customer base. When companies want to
expand into new geographies, it is easy for them to build business by joining
hands with a partner with an established base there.

While considering acquisitions, companies look for
jump-starts. Bigger companies acquire a smaller one doing the relevant or
complimenting kind of business, and build it up from there. "This is
especially true of the knowledge-based industry.

Companies look to reduce costs
and maintain a better EVA. Towards that end, they would consider M&A,"
explains Nitin Shah, MD, Allied Digital.

This means a merger is technically the clubbing of two or
more corporate entities into one. Acquisition, on the other hand, is acquiring
either the business from another company or the entire company. The acquirer may
decide to merge after acquisition of another entity.

A typical merger is very strategic in nature, wherein post
the merger, the nature of both firms is changed hopefully for the better. An
acquisition is more tactical in nature and can be even driven at an SBU/division
level with not much impact on the company as such.

M&A: Do's and Don'ts

Mergers and acquisitions are important decisions. Therefore
partners must look closely at how their companies would gain from a proposed
M&A. A SWOT analysis of both companies would be a good starting point and
would show how they could complement each other, post M&A.

A merger would thus make sense only if the weaknesses of one
company could be covered by the strengths of the other. An M&A would be
justified if the threats faced by one could be taken care of by the
opportunities of the other. Once that is done, the work cultures of the two
entities, their systems and processes, their revenue models and the management
team could be looked into.

Long-term investments made by one would need to be
complemented by short-term revenues or cash reserves of the other; else the
entire initiative would lose steam in record time. The criteria vary from
company to company and depend largely on the long-term vision and growth
objectives of the two companies.

Partners should bear in mind the strategic fit for the buyer—the
exercise should either complete a product gap, a market gap, a vertical gap or
an expertise gap. "There should be a focused, experienced, dedicated team
including people from line functions who drive the entire process from
identifying the M&A prospect, negotiating the terms and finally integrating
the merged or acquired company," believes Sudhir Sarma, MD Netsol.

Before considering a merger proposition, it is important that
partners analyze the benefits and costs in terms of money and then arrive at the
conclusion. Spreading the word to employees and convincing them that the change
is for their benefit is a necessity. Regulatory impact and considerations must
be analyzed.

"Organizational goals, setup, and management pattern,
organizational history of business and promoters, capital structure, product,
market and competitors, moveable and immovable assets and manpower-skill,
unskilled and detailed particulars of management employees should also be looked
into," opines Karun Jain, Director, Visesh Infotecnics.

It will be a prerogative of the management of the acquiring
company to keep interests of their counter-part alive to remain associated. In a
merger, both partners need to have much deeper and better understanding with
clear RRO definitions.

Trends in M&A and future scenario

Experts in the field believe that there are significant
number of mergers and acquisitions happening in the industry today, especially
in business where valued-addition is a norm. Many meaningful, smaller companies
are open to mergers and acquisitions now, unlike earlier times, when M&As
were restricted only to bigger companies. Mergers and acquisitions have thus
gained greater degree of visibility now.

Majority of solution providers are not so large and do not
have the bandwidth (in terms of finances, people, vision) to take advantage of
the move. They tend to be secretive and defend their turf out of fear of losing
their client base. They would get limited in their capacity to reach out to
potential partners. "Solution providers who have invested in defensible
Intellectual Property, promoting their brand or expanding into niche-markets are
the ones most likely to go in for integration and benefit from it,"
believes Sanjiv Bhavnani, CEO, MD, Visesh Infotecnics.

Merging with global enterprises

Globalization, deregulation and privatization have caused the
market to become hyper-competitive. It is imperative for

companies to bring cost competitiveness, speed and operational efficiencies to
scale up the business. The western market has seen this phase and several
M&As have taken place or are in pipeline. Similar market consolidation and
rising number of M&A will take place in India in two to five years, when the
market will be more global and mature, say industry experts.

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. The number of M&A deals overall has decreased as compared to
the activity in the boom years of 1998-2000.

More cash transactions are happening instead of the
over-hyped P/E stock transactions. The Indian focus seems to be more on
acquisitions rather than big bang mergers. The approach seems to be 'a more
low risk, low return approach' as compared to 'the high risk, high return
big bang merger approach'.

In summary, consolidations will happen. Acquisitions will
grow. Indian companies will acquire overseas companies. Foreign companies will
buy out Indian companies and players—focus on building offshore capabilities.
And solutions providers will be right ahead in the queue of all this acquisition
and getting acquired business.

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