Size Does Matter

align="right" border="0" hspace="2">Remember Godzilla? The monster gorilla

that wreaks havoc in New York City and one who made $ 200 million for its producers, Time

Warner, in June this year. Across the Indian IT industry, the Godzilla factor is beginning

to assume shape. Companies are scrambling to get to a critical mass, a size with which

they can enter the global game. Size that will give them the advantage to play the sales

game with pockets slightly more deeper than what they have now. Size that will help them

take on competition that could be bigger. Size that will ensure that they are not

vulnerable to the economic vagaries that might afflict them otherwise. Size that will

enable them to use the magical `S' word-Synergy-to its fullest potential. In the global

market, it is size, or critical mass, if you will, which will determine whether or not one

is a long-haul player.

Back in Silicon Valley (the original), things have already started happening. In the

last 12 months, there is a spate of mergers and acquisitions sweeping the Valley, the most

celebrated amongst them being Compaq's takeover of Digital. Even outside the IT industry,

M&As have been the hallmark of the year 1997-98. In the last twelve months, over 300

M&As worth around $ 200 billion have been completed in industries such as finance

(Chase + Chemical, Citi + Travelers), pharma (Novartis), and IT.

As markets become global in nature, Indian vendors are faced with a dilemma. Foreign

companies will continue to enter the Indian market, notwithstanding the swadeshi jargon

and sanctions. On the other hand, the Indian vendors are by far too small to make a

difference in the global marketplace. Even the largest of Indian companies, this year Tata

Consulting Services with annual revenues of Rs 1,000 crore, is around a quarter billion

dollars, which is miniscule by world standards. If the Indian companies have to make a

mark in the global IT marketplace, then size will become an important criteria.

Amongst the Indian vendors, the desire to consolidate is most apparent in the two old

war-horses of Indian IT-HCL and Wipro. While the former is planning to coalesce the entire

battery of companies into just five, Wipro has already moved ahead by having a single

entity focusing on the entire gamut of IT products and services, both in India and

outside. Both HCL and Wipro share a single ambition, of becoming global companies.

However, the definition of a global company is something that is still unclear at this

point in time. Does it mean revenue streams or the composition of the company? For

instance, roughly half the revenues of Wipro come from international business. Does that

qualify Wipro to be a global company? Or does HCL's strategy of 18 offices across the US,

Europe, and Asia make it global? Or does globalization mean having companies incorporated

in the US or elsewhere in different geographies addressing those or other geographies? If

one were to go by this criterion, then perhaps Siverline Industries is the only company

that qualifies to be called a global company!

It is not that globalization is something that has happened just to the Indian IT. The

entire Indian corporate sector is afflicted with the merger mania. Take pharmaceuticals,

for instance. In a space of three years, Nicholas Piramal has come from nowhere to the # 3

slot in the industry ranking. In the cement industry, Indian Cements has also gone on an

acquisition spree with the latest takeover of Hyderabad-based Raasi Cement. Aluminum major

Indal has been targeted for a takeover as a part of Sterlite's ambitions of becoming a

global aluminum player.

What drives these takeovers and

consolidation? Clearly, the first imperative is one of size. To operate in a global

market, a critical mass is needed. What is also needed is the ability to influence the

market. A Compaq-Digital combine will be far more influential in moving the market rules

than either of the independent companies. The second reason is one of newer technologies.

Bulk of the takeovers in the IT market are influenced by this factor. Intel's aborted

takeover of Chips & Technologies is an example of this phenomenon. It was Intel's

desire to enter the graphics market that propelled the takeover, but faced with protests

from other competitors and a possible FTC investigation, Intel had to back out of the

acquisition. IBM's acquisition of Lotus, which actually sparked off the current takeover

spree, is again a manifestation of Chairman Lou Gerstner's desire to acquire the Notes

technology. The third driving force is markets. The desire to seek new markets, either in

terms of applications or in terms of geographies, is another key deciding factor in the

M&A game. Once again, the prime example is another aborted plan, this time of

Microsoft, to take over Quicken, the personal finance product of Intuit, which forced

Microsoft on a collision course with FTC.

In the Indian IT context, nothing dramatic

seems to be happening, for now. HCL's acquisition of 50 percent of James Martin & Co.

was the first instance and, since then, things have been quiet on the M&A front. On

the service front, where global opportunities are apparently present, most Indian

companies are content with growing arithmetically. As a result, the degree of

vulnerability of Indian software continues to grow. While the Indian market has but tapped

into less than one percent of the total market, the mindshare that the Indian companies

have received is disproportionate. As management guru CK Prahlad remarked in Mumbai two

years ago: "Where is the Indian software industry, I only see an Indian

code-generating industry." While the statement could be particularly unkind to the

psyche of an industry which is growing at a compounded rate of 50 percent per year for the

last four years, the fact still remains that Indian programmers have done a commendable

job in enhancing the reputation of the country.

Not that the Indian software industry is in

a slumber. A handful of companies, such as HCL, Wipro, TCS, Infosys, Satyam etc., have

made significant inroads into full-scale projects, not resting content with parts of a

jigsaw. However, after the hype and din of the Y2K problem, it is estimated that the

Indian companies will probably end up doing just about $ 2 billion worth of Y2K out of the

total $ 600 billion estimated by Gartner Group. While that could be satisfactory for

Indian software industry's growth, it may add precious little to the industry's

positioning worldwide.

Finally, Big is beautiful-and useful too.

In the IT context, Big allows the company to spend money on development-either of

technology or of markets-that Small may not. Size allows synergies. For instance, HCL, in

its consolidated roadmap, has been able to harness the expertise that is available across

the world into one common resource pool. That, according to HCL, will allow the company to

provide global solutions, which are geography-independent, to customers worldwide. In the

earlier scheme of things, the expertise resident in NIIT was rarely available to HCL

America, and by the time it was made available, time would have run out. As a result of

the consolidation, Chairman Shiv Nadar is currently talking numbers which, even two years

ago, might have been described as 'out-of-the-hat.' Consolidation of companies follows

clarity of the V word. And Vision follows a semblance of stability of the business.

Remember Lou Gerstner who confounded management gurus when he declared some weeks after he

took over as Chairman of the company that "the last thing IBM needs today is

vision." Once IBM got its act together, removed the red ink, turned profits,

stabilized businesses, the same Gerstner went on to declare his vision for IBM. Similarly,

with the exception of a handful of Indian companies, few have a vision for themselves or

for the company beyond the next quarter. In this scenario, any activity that is done,

irrespective of the definitions, would only add to the short-term outlook of the company.

And it is because of these reasons that consolidation in Indian IT is restricted to that

handful.