GTL, Redington merger case has vital lessons

BANGALORE: Two M&A deals in a single quarter. Two months later one of them fails to take off. The jury is out on the second one.

According to M&A deal-makers 70 per cent of the mergers have failed in the US. With the exception of Cisco which draws up an post-merger integration plan the day after the acquisition is announced, most M&As have been a victim of change in management structure and lack of an integration roadmap.

“Historically, M&As have failed because some liabilities not considered at the time of announcing the deal come up and organizations are unable to deal with them,” said a Bangalore-based financial consultant.

On this count, GTL Ltd. and Redington could have been saved by a whisker. For the odd-couple called off the merger deal based on perceived liabilities that could hurt a merged GTL Ltd balance sheet.

GTL sought to access Redington’s enviable portfolio of 5,000 vendor products that could lead it to enterprises systems integration deals both in India and overseas market where Redington has a good footprint. This calculation went awry when it delved deeper into Redington’s business model.

One is tempted to term the initial announcement as a premature act by an over-enthusiastic organization. GTL officials could not comment before going online with this story.

GTL was trying to acquire a business, in a part stock swap and part cash deal, that has its dynamics defined by an industry alien to its own. Distribution business is more capital intensive, thrives on volume business and has to constantly deal with bottoming margins. Only established players like Redington , Tech Pacific and Ingram Micro can withstand the vagaries of this industry. This is in stark contrast with GTL’s system integration business where margins are as high as 30 per cent and is skilled manpower intensive.

On May 15 GTL’s board met to take stock of the developments in the merger process a and ended up breaking off the deal the same day.

What came out was the obvious observations. One, Redington could not guarantee the extension of vendor relationship over a period of 3 to 5 years to the amalgamated unit. Two, Redington shareholders had extended huge bank guarantees to their bankers which GTL shareholders saw as too much of a liability.

What is good is that GTL shareholders found the mismatch in time and took a bold decision to move away quickly from the commitment. What was not in place was the initial signals of discomfort the merger deal sent to the market which couldn’t understand how two diametrically different business models can manage to co-exist. They didn’t.

The markets seems to have been cool to the deal since GTL scrips lost ground only on the day of the announcement but promptly regained its position back to the vicinities of Rs. 70 both on BSE and NSE.

A look at the other merger deal, that of Aptech and SSI Ltd, tells a different story. Both are into training. Both were struggling to keep their margins intact in a market monopolized by NIIT. After the merger both brands are expected to co-exist. There is talk of consolidating the number of training institutes the combined entity will have but for it the integration plans seems to be in place. Initial reports of financial liabilities of Atul Nishar, key promoter of Aptech, which may thwart the deal has evaporated. If all goes well for this M&A, we should see a strong training group emerge being second to only NIIT.