ACQUISITIONS: Hang on to That Loose Change!

Come the slowdown, and the clearance sale is on. Companies, especially those

based in the United States, are going for a song, their values squeezed dry by

the slowdown-induced market crash. And we are not just talking that dreaded ‘D’

word here–dot-coms–also up for grabs are solid click-and-mortar ventures. So

it does look like a once-in-a-lifetime get-rich-quick opportunity for India's IT

Inc… but does it, really?

A close look at cross-border acquisition shows two types of results–one,

the acquiring company quickly moves up the value chain, gains a wide base of

customers and beats back the competition. In the second instance, the acquired

unit turns out to be a dead-weight liability in double-quick time, the deal puts

off stockholders and leads to a massive erosion in the acquiring company’s

brand value. Final result–the company graph hits southward wind fast.

The second possibility is what has chief executives in the information

technology industry walking on eggs, reciting only one word out aloud–caution.

And that’s surprising, considering that most of these same CEOs have espoused

the theory of in organic growth for months…but when it comes to making the

actual buys, there is this sudden and perceptible lack of haste (read interest).

It is foolish to rush in

Perhaps, Wipro chief Azim Premji sums it up best, "What is this, a test

of courage?! The boardroom of a business venture is not the platform to

demonstrate one’s courage, assuming that courage is what is needed to make

acquisitions. Business decisions need rationale and the intention of any company

to acquire is an indication of the direction in which management attention is

focused."

K Chandra, chairman of Mascon Global, has another theory. "Some main

reasons for companies not closing deals are inadequate understanding of the

complexities of business relationships and fallouts, lacunae in accounting

policies and lack of preparatory efforts," he says. "In several cases,

the acquiring companies are primarily engaged in body shopping–the US slowdown

has ensured now that early valuations are unrealistic and unsustainable."

"Acquiring a company is not an easy process, especially

when you are acquiring overseas. You need to keep in mind the response of the

employees of the existing company (would they leave under a new management?),

what will happen to the existing promoters and issues of cultural integration.

Cross-border acquisitions have turned up as failures precisely because of these

factors," says Mastek chairman Ashank Desai.

The powers that be at Infosys Technologies insist that

synergy should be the primary concern when going in for any acquisition.

"We are looking at companies that can significantly supplement our existing

operations," says managing director Nandan Nilekani. "Any company that

we acquire should bring strategic benefits to us, not just add to the top-line

or bottom-line. It should have complementary skill-sets, technology verticals

and a solid client base. In addition, the company should have a powerful brand

equity, which can enhance our image." Nilekani adds that though Infosys has

not identified any specific target for a buyout, acquisitions figure prominently

on its agenda as a strategy for growth.

Imperative: A perfect fit

Are companies being over-cautious? Zensar Technologies managing director

Ganesh Natarajan does not think so. "Acquisitions purely for the sake of

adding revenues to the top-line without attention to the strategic and cultural

relevance can be a prescription for disaster," he says. Lest anyone assume

that this implies that he’s opposed to inorganic growth as a strategy, let’s

remember that Natarajan was previously the managing director of Aptech, one of

the foremost exponents of the acquisitions strategy. "In an environment

where size is as important a criterion as any other for winning orders, there is

no doubt that acquisitions are an important route to success for software

organizations. I would even go so far as to recommend that at least 30% of an

organization’s revenues over a five-year period should be

acquisition-led."

Having proposed such a strong dose, what kind of caution does Natarajan

advocate? "Acquisitions should be made only after one has defined core

vertical domains, technology competencies and the services that the organization

is capable of providing. This will ensure that the acquired company becomes

integral to the organization’s core business and can be assimilated without

the usual pains," he adds. It is pertinent here to remember the moot

objective of any acquisition–they are aimed at gaining strategic customer

relationships or key technological or geographical strengths, which may

otherwise take years to build.

At Aptech, strategic alliances, mergers, joint ventures and acquisitions

remain a key strategy–the company has so far closed two deals. "We have

successfully completed two acquisitions–one was that of a California-based

company called Specsoft, wherein we have finished the integration seamlessly. As

for the second, we have acquired a majority stake in Mentorix, a

technology-based training services company. While many companies have been

talking about acquisitions, we have quietly gone ahead and done it too,"

says Aptech managing director Pramod Khera.

It is finding the right fit that requires foresight and calls for some tough

measures in the post-acquisition phase. "Only this can ensure that

integration is smooth and adds to the economic value of the organization

geometrically, and not just arithmetically," says Khera. Acquisitions

appeal to him as an attractive option in the current market scenario, when

valuations are hitting rock bottom. "However, a lot of conviction and

entrepreneurial strength is required by an organization to venture out and go in

for acquisitions. Unfortunately, not many Indian organizations may have that

type of mindset."

The Aptech board recently accepted a proposal to de-merge its two businesses–training

and software. The key driver for the decision was that both businesses should

have independent stock currency to pursue acquisitions and alliances in their

respective industries. "For the training and education business, there are

existing players who make for good targets for acquisition and alliances and we

are actively pursuing these opportunities. On the software side, we are

considering one or two more targets in select markets, verticals or technology,

segments where we want to add value to our existing business," adds Khera.

That’s cool strategizing for you.

Valuation is only the beginning

Market valuation does form the initial basis for identifying a company for

acquisition, but when it comes to closing the deal, there are other issues that

are critical and demand attention. The Polaris-Data Inc deal that went sour is a

case in point. "The Data Inc deal did not come through as the audit

committee concluded that the acquisition, in its proposed form, would conflict

with the interests of shareholders," says Arun Jain, chairman and managing

director of Polaris Software. Does that mean that the company will shy away from

acquisitions in the future? "Certainly not," says Jain, "but we

will only consider proposals that synchronize with company values and visions.

We remain open to any good offers that coincide with the principles laid down by

our investment committee."

"The reason why companies are backing out of certain deals in the final

stages is the change in market perception and valuation," says Cognizant

chief operating officer Lakshmi Narayan. "The due diligence process

normally takes a couple of months–and at the end of this period, it is often

seen that the value of the company in question falls drastically. This leaves

the acquiring company feeling that it is paying more than it should be. It tries

to lower the boom, but nobody likes it to renegotiate once a commitment has been

made."

So while Indian IT companies continue to look at acquisitions as a strategic

tool for growth and to enter new markets, they are also adopting a cautious

approach to insulate their future, growth prospects and business model. This

cautious approach comes into play when an acquisition proposal comes to debate

and determines the course of the acquisition". There has to be some common

ground where the values and the vision of the two companies find synergy,

ultimately pointing to a vibrant future," says Jain of Polaris.

Ajay Chowdhry, chairman and CEO, HCL Infosystems agrees. "The only

reason we haven’t been able to close an acquisition deal is that we haven’t

found the right fit," he says.

"In any merger or acquisition, care should be taken to ensure that there

is synergy in cultural expectations. Only then can acquisitions help companies

increase their client base and geographical penetration," adds Jain.

"At the same time, for IT companies to succeed and grow through

acquisitions, it is important to have a carefully charted-out inorganic growth

plan in place."

An oversell in slow times

So, are acquisition evangelists, in their newfound zeal, overlooking

alternative growth routes? While acquisitions as certainly a means to inorganic

growth, surely other proven recipes like tie-ups and strategic alliances still

hold good. Narayanan from Cognizant thinks so. "Acquisition is not the only

route for getting a technology or market advantage. Partnering or aligning with

companies that have complementary competencies and capabilities is also a viable

option. We have several alliances with technology vendors and consulting

companies such as Viant and CSC, these have worked well for us. When the

partnering opportunity exists, companies need not go in specifically for

acquisitions."

What is happening then is that companies, feeling the pinch of the slowdown,

are prepared to try out any and all options that prop up sagging fortunes. But

this is the time to be extra-careful. "Companies need to be a bit wary of

acquiring in today’s situations. Buying a bad company could mean the end of

the acquiring company. One bad acquisition will kill all value. There are enough

examples of bad acquisitions, and only limited cases of successful ones. The

only good example written about by analysts and discussed by the industry is

Sapient’s acquisition of Studio Archetype," argues Narayan. Mascot’s

recent acquisition of Mastech of Singapore also springs to mind, though it is

early days still to predict the outcome.

Rajeev Narayan

and Deepak Kumar in new Delhi With inputs from G Skrikanth in Chennai and Bijesh Kamath in Mumbai

Cash-rich but Cautious...

Cash-rich but Cautious...

Except for the companies that have raised funds through global market, none

of the other companies have defined the acquisition targets or set aside funds

for acquisitions. Funds raised through foreign market have been primarily

earmarked for acquisitions abroad. Following are the companies that have raised

funds through ADS/ADR/GDR recently

Infosys

The company raised $70.38 million in March 1999 (Rs 296 crore) primarily to

acquire foreign companies. It has however not made any acquisition so far.

Infosys currently has Rs 385 crore in cash balance and Rs 192.67 rore in as

deposits with corporates

Wipro

Wipro raised $113.80 million last year (Rs 500 crore) and currently has Rs

446 crore in cash at the end of March 2001 and Rs 300 crore in other liquid

assets. The company is reportedly eying some major consulting companies in US.

No acquisition made so far

Satyam

Satyam closed its ADR issue last month and raised $161.91 million (Rs 758

crore) with plans to acquire companies abroad. No acquisition made so far. The

company’s latest balance sheet is unavailable hence the exact cash reserve

position is not known. The company has more than Rs 800 crore in hand

SSI

SSI raised $100 million (Rs 450 crore) through the GDR issue it made last

year in March 2000. The company acquired US-based Ablon Orion for $63 million

which was paid by a mix of equity and cash. SSI paid $20 million (Rs 88 crore)

in cash and issued GDRs for the balance $43 million. SSI also acquired India

based 3rd Agenda in all cash deal of Rs 3.25 crore and Indigo International for

Rs 12.60 crore during 2000

Aptech

Aptech made a GDR issue of $75 million (Rs 320 crore) and has acquired

US-based Specsoft Consulting in all-cash deal for $10 million (Rs 47 crore), out

of which $3.5 million has been paid upfront and the balance is performance

linked.

Silverline

Silverline has made a few acquisitons after it raised $125 million (Rs 562

crore) through its ADS issue in October 2000. It acquired Hong Kong-based Sky

Capital International for all cash deal of $22 million (Rs 100 crore). It later

acquired US-based Sera Nova in all-stock deal worth $99 million. Silverline will

issue ADS in lieu of the acquisition. It recently acquired Canada-based CIT Inc

for $4 million (Rs 20 crore). Silverline’s current cash position is not

available and further acquisitions not ruled out

HCL Technologies

HCL Technologies raised Rs 820 crore last year for expansion of offshore

development centers and fund acquisitions. Rs 623 crore were proposed to be

utilized for acquisitions and JVs. No acquisitions have been made so far.

Company has more than Rs 1,000 crore in cash reserves

Polaris Software

Its Data Inc deal was called off last year. The company currently has about

Rs 40 crore in cash reserve

Melstar

Melstar acquired 55% stake in UK-based Global Systems, for $1.80 million (Rs

8 crore) out of which 25% was paid in cash and the balance in convertible

warrants of Melstar. Melstar earlier had 45% stake in the company

Infotech Enterprises

Acquired Cartographic Services, Mumbai for $1.37 million out of which $1.35

million was through equity and the balance in cash. Acquired Germany-based

Advanced Graphic Software. Price not known. Acquired Europe-based MapCentric

through its UK-based subsidiary. Price not known

Source: Techcapindia