Will GTL gain from Redington acquisition?

When GTL (formerly Global Tele Systems) acquired Redington, it was probably the first time in the history of India Inc. that an IT services company was acquiring a company known more for its distribution strengths than niche software prowess. Srikanth R P analyses the deal and its impact on both the companies

L Y Desai believes that the deal gives both companies opport-unities to cross-sell services

When GTL announced the decision to acquire Redington, one of the top three IT distributors in India, analysts were surprised. Surprised because both companies were in totally separate lines of business and synergies between the two companies to command an acquisition or merger just didn’t seem to exist. There was also the question that in a scenario when channel margins were plummeting, how logical was the acquisition of Redington? Before we get to the impact, let us first look at the proposed deal.

The deal
As per the terms of the deal, GTL proposes to acquire the Redington group, consisting of Redington India Limited, Redington Pte Ltd, Singapore and Redington Gulf FZE in the Middle East, for a total consideration of $95 million in a cash and stock deal. Out of this, $50 million would be paid in cash and $45 million would be payable by a stock swap. What is also noteworthy is that Redington will become a significant shareholder in GTL. This deal, if successfully implemented, would mean that the turnover of GTL would go up from Rs 532.81 crore (fiscal year 2002) to over Rs 3,000 crore. The estimated revenues of the privately held Redington group for the year ending March 31, 2003 are expected to be over Rs 2,500 crore. Of this, revenues from Indian operations are likely to be over
Rs 1,400 crore.

At first glance the acquisition may look amateurish. But a thorough study of the deal shows that it may prove to be a masterstroke in the long run. The deal also throws up some interesting pointers towards the way the industry is headed. No longer are companies playing the waiting game, investing in huge resources to develop skill sets and then looking out for markets. The current competitive scenario, coupled with an economic slowdown, has meant that companies having diverse strengths can come together to not only counter competition but also effectively seek new markets.

Global trends
If you look at global trends, even pure-play hardware manufacturers are trying to increase revenues by making a foray into services. The case of hardware giant IBM, which has successfully managed to increase its revenues from services, is a perfect example of this trend. Though GTL is certainly not in the league where IBM plays, it has learnt some lessons from Big Blue. The company knew that in the long run, a player having the capability to offer services from an end-to-end perspective would be preferred to a player offering only specific services. Recent trends also showed that customers preferred dealing with a single vendor than with different vendors for outsourcing or managing their requirements.

In line with this vision, GTL, which was only in the systems integration and managed services space, was scouting for an acquisition that would give it the strengths to offer services across the spectrum. After looking at Redington, the company knew that there were more complementary benefits than overlaps if GTL could acquire Redington.

Says GTL’s chief investor relations officer, L Y Desai, “In an industry where technology changes rapidly, vendor relationships and domain knowledge across various technologies and products are the key to gain a competitive edge over other companies. Redington, being one of the top distributors has built close relationships with most big vendors like Microsoft, Oracle, Cisco, HP, IBM and Intel. In the IT space, these relationships are very valuable. Additionally, Redington’s strengths in supply chain management and logistics is a huge plus to our network engineering and enterprise solutions business.”

In addition to vendor relationships, GTL will also gain access to geographies like North America, Europe (UK, Germany), Middle East (Saudi Arabia, UAE) and Asia-Pacific (India, Australia, New Zealand, Singapore, Mauritius) where Redington has a presence. This effectively means that GTL, which had a presence in only nine countries, now has access to 25 countries. The time to market and service customers is therefore effectively lesser. GTL will complement Redington’s distribution strengths with its own strengths in the areas of technical helpdesks, network management, systems integration and application maintenance. Vendor neutrality will be another concept that GTL will push in an aggressive manner to differentiate itself from other similar players in this space. As Redington gets access to the latest products from vendors who account for a majority of the market, GTL can not only offer quick turnaround time for completing a project but also get domain knowledge on the latest products. Going further, GTL would extend the same concept and explore the possibility of setting up R&D labs for different vendors.

In the domestic market too, Redington has a huge presence and operates from 37 locations, 36 service centres and a huge channel base of around 5,000 channel partners. This will not only help GTL in taking advantage of the logistics strengths of Redington but also in expanding its footprint across the country. Further, Redington, which was exploring the possibility of scaling up its BPO operations but was limited by manpower (650), can now look to GTL for negotiating BPO/help desk businesses with large international customers.

Desai sums it up by saying, “The deal gives both companies opportunities to cross-sell each other’s services. While we have a focus on services, Redington focuses on products. The combined entity gives us an opportunity to cover the entire spectrum from distribution, support and services.” And in tough times like these, the acquisition may give GTL the growth it is looking for in a tough market.