Making Sense of a Merger

The age-old adage, ‘Beauty Lies in the Eye of the Beholder’ seems to be

true of corporate M&As as well. How else can one sum up an IT services

company, GTL, buying a thoroughbred IT distribution company, Redington? The deal

has been clinched for $95 million (Rs 500 crore), in a part-cash and part-stock

swap deal. What’s jarring in this marriage is the obvious incompatibility–this

is the first time an IT services company is taking over a product distribution

specialist to further its growth. The vow of perfect synergies by both camps,

notwithstanding, questions abound.

GTL thinks it is sitting on a goldmine of help desk and BPO business, which

Redington has access to thanks to its distribution partnerships with principal

vendors. GTL says it has 2,400 employees, of which 70% 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 by

adding GTL’s system integration capabilities. And then, there’s the

long-shot explanation of GTL adding Redington’s products in any project, which

bring in 70-80% of the project cost.

One is not sure how a combined entity, said to be Rs 3,000 crore after the

deal, will handle its distribution business. GTL will have to learn to balance

the distribution business–whose operating costs are high and margins

wafer-thin–with its higher-margin services business. The inequity is amply

demonstrated in the valuation of Redington at a mere Rs 500 crore.

"You cannot equate the valuation of a software firm with that of a

distribution firm, since the latter operates on very thin margins," said

Redington India CEO Jitendra Kulkarni.

Neither camp is worried, maintaining that Redington’s distribution business

would not be disturbed and would continue to operate as a separate business unit

under the same brand.

For all the argument’s worth, this is the first time such a deal has been

struck. Conventional wisdom has been to vacate distribution to specialists

capable of moving products, in high volumes, and managing the channels better.

The advent of Ingram Micro and Tech Pacific in India has made distribution a

highly-specialized game–margins are wafer thin and volumes high.

For Redington, the 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 offers GTL corporate customers or brings in BPO orders from its

principal vendors. GTL’s confusion has taken a toll. Two months back, the

entire team of 50 professionals from GTL’s enteprise services division quit

the company, citing lack of direction.

Having said that, there are some pluses to this marriage. Sheer size may give

it brand and bargaining power. And they have got a fair deal, with a stock swap

thrown in. "Redington’s valuation is based on its PAT and because it is

not listed in India. GTL’s listing means value–that’s why the stock

swap," says GTL investor relations officer LY Desai. "There are

two-to-three things going for this buy. Customers want one firm to provide all

the services, so while GTL can offer consultancy and services, Redington can

deliver the logistics," says Kulkarni.

The merger also beefs up geographical reach. While Redington has a strong

presence and infrastructure in India, Asia-Pacific and West Asia, GTL is located

in Europe and US. The merger sees the new entity have offices in all major

markets in the world.

Special CIOL Report



Prashanth Hebbar & Ranjeet
Rayen