M&A could be new mantra in Indian IT industry

Thursday, 21 November 2002, 08:00 Hrs
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BANGALORE: Mergers and acquisitions, or M&A, could become the way out for several mid-sized and small companies as the clones of the biggies get "clobbered" in a possible shakeout in India's IT industry.

Mascot Systems' planned acquisition of U.S.-based eJiva and Hyderabad-based Aqua Regia to drive business growth is being seen in industry circles as a logical step towards meeting the demands of the uncertain global business environment.

The upswing in the fortunes of the biggies like Wipro and Infosys -- dramatically raising the graphs at stock exchanges -- and the unlisted but biggest of them all TCS has not meant only crumbs for the mid-sized and small but focused, differentiated and experienced companies with domain expertise.

But to survive comfortably in the global market of uncertainty, top executives of mid-sized and small companies have begun serious discussions on assessing each other's strengths and weaknesses, including the tricky issue of valuation, for mergers and acquisitions.

"You will find a lot of interesting combinations happening in the next six months. Customers are not going to give business because of cost or range of services. They are looking at focused companies because they want to play it as safe as possible in the current environment," Anand Sudarshan, CEO of Planetasia, Microland group, told IANS.

"There is a 180 degree change in attitude. Customers are looking at long-term relationships. So the question is: can the other guy meet our requirements for more than a couple of years? This is why the track record is being seen so closely by customers," says B. Ramaswamy of Sonata Software.

"Basically, customers are looking for a comfort level like how many people can this company throw at the problem. At the end of the day, it is the quality of the people that will determine their outsourcing relationship," adds V. Ravichandar, MD, Feedback Services.

"The current situation only means that the small ones are getting clobbered and a shakeout is going to happen sooner than expected. The synergies, the horizontal breadth of services and the portfolios on offer are what the customer is looking at now, not to forget how fast the company can scale up productivity."

Adds Ananth Koppar, CEO, Kshema Technologies: "The boutique companies will slowly start dying, though none have died yet. But the fact is that many are reducing their numbers drastically, some from 100 to 50. The clones of the big ones will not survive."

The global downturn forced the big companies to play on the turf of the mid-sized and small companies because of price pressure. The situation got worse post-September 11, pushing the clones of the biggies and those with no domain expertise into a precarious situation.

Those who stayed away from the herd survived the downturn by changing business models, acquiring new clients or strengthening customer relations.

"Mid-sized companies continue to grow. Once the bigger guys move into larger projects, it opens up the windows for the mid-sized and smaller ones. Sooner rather than later, customers will look at younger and smaller companies for outsourcing," says Ashok Soota, chairman, MindTree Consulting and president of the Confederation of Indian Industry (CII).

But M&A isn't the only -- or immediate -- answer to the challenges ahead.

"We have to build organic capability before looking at mergers and acquisitions. It has to be complimentary and should make strong business sense," says Sonata Software's Ramaswamy.

Sonata has restored the 10 percent cut in wages after a profit warning the previous year by focusing on financial sector, banking and insurance sectors to report sequential growth in the last four quarters.

"In principle, we are open to acquisition or merger, but we will wait at least until the middle of next year. We are not in a hurry," says MindTree's Soota.

"Ours was a rapid growth in the first year followed by growing from a small to a big company. In the third year, we have decided to focus our tech business on industry automation, aviation and automobile, communication electronics and embedded systems. We would like to get these through by middle of next year before thinking of mergers and acquisitions."
Source: IANS
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