Merger on the Rocks

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.

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.

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