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Making sense of GTL, Redington merger

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CIOL Bureau
New Update

Prashanth Hebbar and Ranjeet Rayen

The age-old adage, `Beauty is in the eye of the beholder’ seems to be true of corporate M&A too. How else can one sum up an IT services company, GTL buying a thoroughbred IT distribution company, Redington? The deal has been clinched for a $95 million (Rs 500 crore) in a part cash and stock swap deal. Read full acquisition report>

Following the announcement GTL’s shares on BSE jumped 2.5 per cent in the first two hours of the morning trading at Rs 85 and over Rs 7 crore worth of shares had changed hands. However its scrip dropped to close the day at Rs 78.10, down 4.5 percent.

What’s jarring in this marriage is the obvious incompatibility. This is the first time an IT services company taking over a product distribution specialist to further its growth. Vow of perfect synergies by both camps notwithstanding many questions abound. First and foremost is why will a services company which has a fairly high profit rates takeover a company whose operating costs are high and margins wafer thin. A fact amply demonstrated in the valuation of Rs 500 crore when the consolidated revenues of Redington Group is expected to touch Rs 2,500 crore. "You cannot equate valuations of a software firm with that of a distribution firm since we operate on very thin margins," admitted Jitendra Kulkarni, CEO of Redington India.

Second question playing on the minds of industry observers is what value does GTL get out of Redington. GTL thinks it is sitting on a goldmine of help desk and BPO business that Redington has access to through its distribution partnerships with principal vendors. GTL says it has 2,400 employees of which 70 per cent are qualified engineers and will be able to extend the help desk service in no time.

Redington on the other hand says it gets to increase its value chain in offerings by adding GTL’s system integration capabilities. And then we have a long shot explanation of GTL adding Redington’s product part of the deal in any project, which brings in 70 to 80 per cent of the project cost.

One is not sure how a combined entity, which is touted to be Rs 3,000 crore after the deal, will handle its distribution business. Both camps maintained that Redington’s distribution business would not be disturbed.

For all the argument’s worth, this is the first time such a deal is struck. In fact, conventional wisdom has been to vacate distribution to specialists who will be able to move products faster, in higher volumes and manage the channels better. The advent of Ingram Micro and Tech Pacific in India has made distribution a highly specialized game where margins are wafer thin and volumes high.

By announcing this deal, GTL seems to have surprised everyone including the market punters who were expecting an acquisition but of a technology company. For the last few weeks GTL’s shares have seen a spurt.

For Redington, this acquisition may mean an entry into the high margin IT services business, which it has been eyeing for some time. However, the odds seemed to be stacked against GTL.

In one of its earlier avatars GTL was into vending fax machines and telephone systems. Then it moved over to being an IT services company. The present acquisition does not fit into the picture unless Redington is offering GTL corporate customers or bring in BPO orders from its principal vendors.

GTL’s confusion has had its toll. Two months back the entire team 50 professionals of GTL’s Enteprise Services division quit the company citing lack of direction.

There are some pluses to this marriage that are visible though. GTL becomes an instant DQ Top 20 star in the coming years survey with Rs 3,000 crore combined turnover. The sheer size may give it a good brand power and bargaining leverage. And they have got it for a fair deal with a stock swap thrown in too. " valuation is based on its profit after tax and the fact that it is not a listed company in India. They also value GTL’s listing and that is why they are going in for a stock swap," said LY Desai, GTL’s chief investor relations officer.

"There are two to three things for this buy. Customers today want one service provider to give all the services, so while GTL can offer consultancy and services, Redington can deliver the logistics," says Kulkarni.

Undisturbed by this acquisition, Redington is expected to continue its operations as one of the largest distributors of IT products in the country, retaining its brand and management. This would ensure the company’s position as a top rung distributor additionally providing consultancy and services to its customers.

The merger of these two companies also spells out the geographical reach of these two companies. While Redington has a strong presence and infrastructure in India, Asia Pacific and Middle East, GTL is located in Europe and US. This merger makes the new entity have an office in all major markets in the world.

After all, GTL may set a precedent of pulling together a combination of IT services and specialist distribution business with startling results.

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