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Merger on the Rocks

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DQI Bureau
New Update

The inorganic growth paths of many Indian IT companies are strewn with

thorns. Often an ambitious acquisition announcement fizzles out in the final

stages for reasons best known to the companies involved. This time around, two

companies–Redington and GTL- have come under the microscope of the media. When

GTL announced that it is going to acquire Chennai-based IT distribution major

Redington India together with other group companies–Redington Pte Ltd and

Redington Gulf FZE through a $95 million stock and swap deal, it made ripples in

the industry.

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Industry analysts tried to figure out the likely synergies of this deal–GTL

is a network engineering and IT services company and Redington, a pure play IT

distribution player. Do they have anything in common? Yes, said GTL-Redington

officials at the time they announced the deal couple of months back. For

instance Redington Group’s MD- R Srinivasan observed then, "The Chanrais–the

promoters of Redington Group firmly believe that the business synergies between

both the companies offer great potential for growth and scalability"

The theory envisaged earlier by both company officials was that GTL would

lend its expertise on supply chain management, thereby enabling Redington to

manage multiple brands with relative ease. Also by using GTL’s system and

network integration capabilities, Redington can also focus on enterprise

solutions. In return the value GTL saw from Redington is the customer base of

its top line MNC vendors. It sure looked rosy enough on paper, but little did

both the companies realize at that time, the so-called synergies would become

myopic very soon.

Synergies unlikely



The synergy theory never saw the light of the day, because both GTL and

Redington have mutually agreed not to go ahead with their merger/acquisition

plan. The bone of contention revolved around two areas, for one the extension of

Redington’s vendor relationships cannot be guaranteed in a sustained manner

over a three to five year period. Two, the financial guarantees the Redington

Group has extended to its vendors and bankers sum up to a significant figure.

Given that, the same cannot be reflected in the GTL’s balance sheet.

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With that, one of the recent and much talked about M&A have come to a

close. This is not surprising in an Indian context where many mergers have gone

astray in the past. But the GTL-Redington case becomes a good management case

study. Mergers in the past are mostly between two companies that are in the same

line of business. For instance a software service company acquiring its

competitor or an IT products company. A perfect example would be the Polaris-Orbitech

merger or the SSI-Aptech deal. While Redington does not divulge the exact

details of why the deal fell apart, most of the industry observers believe that

GTL’s approach of vendor neutrality that it was pitching earlier as the one

main outcome when the deal was proposed might not have come to fruition.

Moreover, the flexibility of large vendors in Redington’s portfolio to GTL’s

strategy assumes ambiguous proportions. For instance, how far the vendors’

clients will be receptive to fresh business proposals from GTL have to be

pondered with. All these are assumptions that rationalize the concerned

companies stand.

Meanwhile, both Redington and GTL say it is business as usual and seem

unscathed by the fallout. GTL despite this has earmarked around Rs 250 crore to

pursue acquisitions that matches its business ambitions. Redington, on the other

hand has had a good year business wise, and has closed this fiscal with revenues

in excess of Rs 1,600 crore. Yet another unique aspect of this particular issue

is that it is not a distressed M&A. Both Redington and GTL are profitable

companies and hence the likely impact of the fallout will be very minimal.

Shrikanth G in Chennai

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