The Hindu Business Line : More IT cos set to join M&A bandwagon

"M&As are an attractive proposition for companies planning to move up the value chain and expand their geographical presence," Mr Ravinder Dattar, Principal Analyst, Gartner.

Mumbai , Jan. 1

THE year 2004 will see more Indian IT firms jumping on to the mergers and acquisition bandwagon. And this time around it will not be the Indian software industry's big guns alone doing the M&A rounds. Small and medium enterprises are keen to spur their growth traction.

Indian software firms will cherry pick abroad, scouting for mid-sized (read over 500 people organisation) US or European companies that have a good local presence and long-term customer relationships.

Research and analyst firm Gartner believes that 2004 will witness more Indian companies establishing their footprint in the global market through the acquisitions route. "M&As are an attractive proposition for companies planning to move up the value chain and expand their geographical presence," Mr Ravinder Dattar, Principal Analyst, Gartner, told Business Line.

Moreover, M&As would allow the software services firm to offer the full range of service offerings including BPO, reasoned Mr Jotdeep Singh, Associate Director, Corporate Finance, Rabo India Finance Pvt Ltd. He said the investment for M&A by a mid-sized firm would be in the region of Rs 30 crore to Rs 250 crore.

Aftek Infosys, for instance, is closely evaluating three different companies to prop its inorganic growth. "We will either fund this through equity or cash," Mr Ranjit Dhuru, Managing Director, Aftek Infosys, said.

IT training major Aptech Ltd is on the acquisition path as well, with an announcement about a forthcoming M&A of a mid-sized firm expected shortly.

According to Mr Pramod Khera, CEO, Aptech Ltd, the investment would be from the proceeds of its recent GDR issue. Infinite Computer Solutions is yet another company with an aggressive M&A strategy, having started the due diligence process with short-listed companies, informed Mr Upinder Zutshi, COO, Infinite Computer Solution.

The coming year will also observe the Indian software industry go through consolidation, in particular the SME segment. According to Mr Dattar, SME companies would acquire similar rung firms or get gobbled by bigger IT enterprises that need to achieve critical mass urgently. Acquisitions would also provide smaller firms with indirect access to the stock market through the merger of the unlisted Indian IT companies with the listed division of IT firms, observed Mr Singh.

Optimism pervades the IT industry with interesting trends like multi-year, multi-million dollar contracts and stabilised billing rates. Explaining this trend, Mr Zutshi of Infinite Computer says, "The nature of the relationship between customers and us has changed gradually from one of being a supplier to being an IT partner."

While companies faced pressure on billing rates last year, 2004 is expected to have a stable offshore billing rates in the $22-$25 range. Moreover, the ratio between offshore and onsite projects will tilt in favour of the former since offshore spending would record some growth.

"US companies will face business compulsions to conduct their business more efficiently, so the backlash as it is visible now will fade out," observed Mr Dattar of Gartner.

On a more sober note, the optimism that the Indian software sector will post a 30-per cent growth rate is tempered with caution.

"Indian companies should stop making a big noise about the projects they get; instead they can tout the advantage of scale that they can offer," Mr Arvind Kher, COO, Ensim India, said.

This sentiment is echoed across the board with several companies planning to conquer global markets minus trumpets blaring the Indian advantage.

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