Acquisitions in IT space take a hit

Deal closure timeframe for most mergers and acquisitions has increased significantly. 

The merger and acquisition (M&A) scenario in the information technology sector has not yet picked up, though assets have become cheap. Moreover, while interest is active among companies to seek inorganic opportunities, the transaction timeframe for most deals have increased significantly. 

“The deal flow hasn’t reduced significantly this time round, but the transaction timeframe has increased. On an average, we see deal timeframes increasing by 40-50 per cent,” said Amit Singh, executive director and technology practice head of Avendus Capital, an investment bank which was an advisor to the recent Satyam deal. Singh, who headed the execution team for the Satyam transaction on behalf of Avendus Capital, said it was usually easier to do a deal in a bull market than in a bear market. There is always euphoria about doing a deal in a bull market, when “all the parties want to partake in a bull run. The sellers feel good about selling because they expect to get a good valuation for the value they have created in their business. From the buyers’ standpoint, they perceive tremendous growth opportunities and hence they want to capitalise on that by acquiring missing competencies. And, of course, cheaper and abundant capital availability adds to the mix,” he said. 

M&A activity in India, says recent report by Venture Intelligence, was down by 54 per cent in the second half of 2009, compared with the same period in the previous year. M&A activity in the IT and ITeS (IT-enabled services) space declined by about 27 per cent in the first half of 2009, compared with the same period last year. 

In a bear market, the seller is always conscious of the fact that they should not be seen as desperate to sell out, while the valuations on offer were usually low, Singh said. Hence, both from a positioning as well as from a financial perspective, the market was not to the seller’s advantage, he added. 

“Though capital-rich buyers tend to get quite active during downturns in the hope of picking up quality assets on the cheap, they usually end up delaying the decision in the hope of the market further bottoming out — till it is gets a shade too late,” he cautioned. 

According to Singh, while Indian IT firms are looking outward to further their growth initiatives, many of the global software majors were also looking at investing in India to cement their growth strategies and profit improvement plans. The Indian market, which has become a centre of attraction owing to the large IT infrastructure modernisation programmes of the governmen,t as well as PSUs, is expected to attract investment opportunities from global technology players for acquisitions. 

The Indian IT outsourcing industry, being critically dependent on the exports market, is still under the shadow of the global economy which is yet to come out of the doldrums. Most Indian IT majors that had given muted growth projections for the next two quarters are expected to look at improving their topline through inorganic means. 

“Moreover, the last round of significant exchange rate fluctuations, which saw the rupee yo-yoing against the US dollar, has impressed the need for a more balanced geographic distribution of revenues upon the IT majors. Achieving that organically is time-consuming and that makes acquisitions an attractive option,” Singh said. 

On the other hand, are the captive operations of global firms in India looking attractive as the parent companies of most of these centres plan to sell these off to improve margins? Captive acquisitions have their own challenges as well, Singh said. The good part is that acquisition of captive operations usually come with a large long-term contract from the parents, which gets factored into the price. The bad part is that skills so acquired are usually not replicable with other clients. 

“If you compare this with any other normal acquisition, then whatever IPR (intellectual property rights) and competency that gets acquired can be taken to newer clients and hence the synergies are easier to quantify,” he explained. 

He added there is an element of protectionist policies erected across the developed world to prevent the perceived flight of IT jobs to the developing countries. “So, in sectors that are witnessing significant government sponsorship, like healthcare, it makes tremendous sense for Indian IT companies to look at acquisition of onsite targets,” Singh said.