Size Does Matter

Conle.jpg (30795 bytes)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.

The IT Giants
Group97-98
(Rs Crore)
96-97
(Rs Crore) 
Constituents
HCL
  
2284.36
  
1705.00
  
HCL
Insys, HCL Insol, NIIT, HCL Consulting, HCL Perot, HCL Deluxe, HCL Comnet, HCL
Peripherals, HCL OA
Tata**
  
1885.83
  
1671.82
  
TCS, TIL, Tata
IBM, Tata Elxsi, TTL
Wipro   1048.70
  
971.50   Wipro Infotech
Group
HP   655.70   596.00   HP India, HP ISO
IBM*   644.70   577.00   Tata-IBM, IBM
Global, Lotus
JTS Group#
  
593.60   622.00   JTS Inc., US
Godrej
  
441.80   222.31   GPTL
Compaq
  
435.00   359.93   Compaq India
Digital
  
401.63   320.91   Digital India
Microsoft
  
350.00   200.00   Microsoft India
CMC   327.16   242.47   CMC, Baton Rouge
Unicorp
  
314.60   232.56   Unicorp
Industries, Unicorp Vietnam
Aptech
  
304.00   230.71   Aptech
Redington
  
287.31   171.07   Redington
Pentafour
  
284.55   171.53   Pentafour
Software, Pentafour Communication
Acer*   273.80   265.19   Wipro Acer
Infosys
  
260.40   143.80   Infosys, Yantra
Corp.
Patni Computers247.58   173.89   PCS Industries,
PCS UK, Data Conversion Inc.
Tandon
  
240.56   223.35   Tancom, ATD,
Kollmorgen, Tandon Info, Tandon Computers, Golden Computers
Sun   225.77   216.00   Sun India
*IBM
and Acer revenues reflect total Tata IBM, IBM GS and Wipro Acer revenues respectively.
**Indicates cases where the GAAP equity has been implemented.
#95% equity is with JTS Inc. and not Tandon Group. Hence the same has been shown
separately.

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.

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