M&A: A Strategic Imperative?

MUMBAI: Mergers and acquisitions are becoming a strategic imperative for Indian IT services companies. Contrary to popular belief, Indian companies are not being eaten up, but are actually acquiring companies abroad to supplement their skill, experience, and reach.

Seven out of ten M&A activities in India are outbound, and that balance of equation will not change drastically in near future. These were the only consensus view in a panel discussion on “mergers and acquisitions — strategic imperatives for Indian and multinational companies” organized as part of NASSCOM India Leadership Forum 2006.

While broadly agreeing that M&A has become a strategic requirement for growth of the Industry, the panelists, however, differed in their views on the objectives, the models, and implications of M&A for Indian companies.

“One big opportunity out there is to look at the captive operations of companies,” said Phiroz Vadervala, executive vice president, TCS, adding that the large captives of European companies make an attractive acquisition target. “It is a heavily de-risked strategy. You have usually assured revenue for the first few years from the erstwhile parent,” he said.

Disagreed Ranu Vohra, chairman & managing director, Avendus. “Captives can be a great opportunity, if you can pick up the right ones at right time,” he said. “But you cannot build a corporate M&A strategy out of that.”

There was significant panel time devoted to discussions on the role of private equity firms in the M&A process. This was interesting in the context of recent developments, wherein private equity firms like Texas Pacific Group and Blackstone bid for large outsourcing companies like CSC and ACS, though none of those discussions have fructified yet.

“Medium-sized firms like ours can tie-up with private equity firms to do acquisitions and that is a significant opportunity,” said Neeraj Bhargava, CEO WNS, of the second biggest pure play BPO firm based in India. He said that his company was having discussions along those lines but did not elaborate. Legendary VC Promod Haque, managing partner, Norwest Venture Partners, endorsed the idea and said that it is becoming a necessity, though he was not too sure whether it is an opportunity yet.

Saurabh Srivastava, executive chairman, Xansa India, had an interesting variation of viewpoint. He said M&A today is not a matter of opportunity. It is a matter of survival. “Customers are asking for risk and reward sharing by their service providers. That requires big balance sheets. Today, you do not have the option of achieving that through gradual, evolutionary process. You need to do M&A for survival,” he explained. “In other words, customers are dictating it,” he said.

Most of the discussion was focused on Indian companies acquiring rather than being acquired. That is not surprising, considering the fact that seven out of ten M&A deals that happens involving an Indian company is an outbound acquisition. The piece of information was given by Ranu Vohra and was substantiated by Saurabh Srivastava giving real statistics. All panelists agreed to the observation, from their personal experience.

However, all panelists agreed that most of the deals are small and are used by the Indian companies to acquire skill in a vertical, a technology skill, or consulting capabilities. Indian companies do not acquire for scale and that is not likely to change, agreed most panelists. Bhargava of WNS and Vaderwala said there is little value in trying to acquire a big company because the kind of 30-40 percent margins that Indian companies are used to will be diluted by big acquisitions.

There is no need for those acquisitions, said Haque. “There is little value in trying to acquire a big American company,” said Haque. If Indian companies do want to acquire, they should look at emerging destinations, he added. Vadervala said Europe could be a dark horse.

Edward Males, Managing Director, Jefferies, attributed this to lack of M&A experience of Indian companies but was quick to add, “these skills can be learnt.”

Vohra said Indian companies do not believe they have reached the peak in valuations, because they are still growing impressively. “They still do not use stocks to acquire. It is almost always cash,” he said.

A question involving mergers among Indian companies drew lukewarm response from the panelists. Maybe, they take globalization a little too literally.