M&A: What motivates Indian companies?

The past couple of years have seen a spate of mergers and acquisitions by Indian IT companies. Companies have taken to M&A for different reasons. Abhinav Singh attempts to understand the rationale behind Indian IT companies making acquisitions and getting merged

M&A activity is on the rise in the Indian IT industry with the last couple of years having seen a few large mergers and acquisitions. Whether it was the merger of Polaris with OrbiTech or Wipro's acquisition of Spectramind and GE Medical Systems Information Technology (India) or Mphasis BFL's acquisition of a Chinese firm, mergers and acquisitions in the Indian IT industry are here to stay and more are expected to follow in the near future. Why do Indian IT companies opt for M&A?

The size factor
Many companies have undertaken M&A to grow in size by adding manpower and to facilitate overall expansion. The Polaris-OrbiTech merger saw a spurt in the merged entity’s revenues from $60 million to $125 million. The merger also added 1,400 employees to Polaris, taking the total employee strength to 4,000.

Similarly, for Bangalore-based vMoksha Technologies, the logic behind the acquisition of two US-based companies, Challenger Systems and X media, was to increase in size by widening its customer base. Pawan Kumar, chairman and CEO of vMoksha Technologies says, “The size of a company does matter when interacting with customers and clients. These acquisitions added 120 people to our staff.”

The acquisition of China-based Navion software helped Mphasis BFL increase its employee strength by 85 people and expand its business in the region. Similarly, when software services giant Wipro acquired BPO player Spectramind, it helped the company expand into the BPO space.

In the same vein, Bangalore-based Mascot Systems’ acquisition of US-based eJiva and Hyderabad-based Aqua Regia enhanced the company’s value proposition and made it globally competitive. With the acquisition of eJiva and Aqua Regia, the total employee strength of Mascot Systems increased from 1,700 to 2,000.

To gain new customers
One likely reason behind M&A has been to gain new customers. Polaris Software had six major customer wins after it acquired the Intellectual Property Rights (IPR) of OrbiTech’s Orbi suite framework of banking solutions. vMoksha also saw a rise in the number of its customers (four new customers) due to acquisitions as it expanded considerably in the US market and leveraged on the existing customer base. Mphasis also added new customers in the Japanese and Chinese markets after the acquisition of Navion.

The need for skill set enhancement
The need for skill set enhancement seems to be a major reason for companies to merge and make new acquisitions. The Polaris-OrbiTech merger helped in combining skill sets of both companies, which in turn led to growth and expansion of the merged entity. While Polaris Software was looking for a specialised product suite, OrbiTech was looking forward to efficient marketing and service support for its products. Post-merger, Polaris got the Orbi suite framework and combined it with its service expertise to win more customers. After the merger, Polaris has become a large, specialised company in the banking, financial services and insurance (BFSI) space, offering solutions, products and transaction services. Polaris has had some recent post-merger wins, including ABN-AMRO Bank, Kuwait Commercial Bank and Deutsche Leasing.

Wipro acquired GE Medical Systems Information Techno-logy (India) to leverage its specialisation in the health science domain. The intellectual property that Wipro acquired from the medical systems software company provided it with a platform to expand its offerings in the Indian and the Asia-Pacific healthcare IT market. Similarly, when Wipro acquired the global energy practice of American Management System and the R&D divisions of Ericsson, it acquired skilled professionals and a strong customer base in the areas of energy consultancy and telecom R&D.

vMoksha Technologies’ acquisition of two US-based companies helped it to increase its size, and leverage on the expertise of the acquired companies. Says Kumar, “One of the acquired companies is very strong in banking and we leveraged this factor to gain some good banking customers.”

Likewise Bangalore-based Mascot Systems was benefited by the technical expertise of eJiva and Aqua Regia, the two companies it recently acquired. The acquisition also helped Mascot to extend its offerings through a portfolio of complementary services, technologies and skills.

Expand their market reach into new geographies
Many Indian companies have carried out acquisitions and mergers to expand their reach in international markets and
to spread across different geographies.

Mphasis BFL, through its acquisition of Navion software wants to expand its operations into the Chinese and Japanese markets. Ravi Ramu, Mphasis BFL’s group chief financial officer of says, “The need for developing a near-shore centre for the Japanese market triggered this acquisition. Besides this, we plan to tap the skilled labour force in China to improve our prospects in the region. We also plan to tap the local market at a later stage and use the Chinese base as an alternative centre for our offshore services in the region.”

Similarly, vMoksha Techn-ologies after acquiring the two US-based companies has cemented its base in the US market and plans further expansions from here. Adds Kumar, “With the acquisitions, we also expanded our reach in the US market besides India. Since the majority of workforce in the acquired companies was Indian, integration was much easier and smooth”

What does the future hold?
Many Indian software players see a rise in the number of mergers and acquisitions by Indian IT companies in the near future. Kumar says, “A rise in the number of mergers and acquisitions by Indian IT companies is likely in the near future due to competition ushered in by the influx of MNC IT companies. In order to compete with global IT majors setting up base in India and to expand their global reach, more and more Tier-1 Indian IT companies would acquire global Tier-2 IT companies.” Similarly global Tier-1 IT companies in order to penetrate deeper into the Indian market would look at Tier-2 Indian IT companies in the near future. vMoksha would always keep its options open for further acquisitions and would do so as and when it gets good opportunities, he adds.

Many players feel that Indian IT companies look at M&As due to the size factor, the niche factor or for expanding their market reach . Many are also of the opinion that acquisitions help in the inorganic (and quicker) growth of the business of a company and the decision to acquire or grow organically depends on the business targets that the companies have set for themselves. Some feel that in today’s competitive economic environment, size and focus are factors that matter for surviving the onslaught of competition. In this scenario, mergers and acquisitions have emerged as key growth drivers in the Indian software services landscape. Apart from this, the importance, size, pricing pressures and global companies consolidating and building offshore capabilities have made M&A relevant for Indian IT enterprises.

But Ravi Ramu of Mphasis terms the whole spate of mergers and acquisitions as premature and says that although there will be a few acquisitions and mergers in the near future there won’t be a whole lot of them. However, according to him, Mphasis will always be on the lookout for further acquisitions.

Mergers and acquisitions are primarily aimed at expanding a company’s business and earning profits for it. Acquisitions bring in more customers and business, which in turn brings in more money for the companies thus helping in its overall expansion and growth. More and more companies will move towards acquisitions for a fast-paced growth.