Shopping hour?

Is it time for Indian software companies to think of acquisitions?

Krishnan Thiagarajan

``I THINK the time is ripe for doing a good acquisition. But is this the time to pay for a company which itself is not sure about what its own visibility is? Maybe not. We want the dust to settle. But if we wait, we will probably fall behind the curve. So I would say that we are probably 90 per cent ready to make an acquisition.'' -- Vivek Paul, Vice-Chairman and Executive Officer, Wipro Technologies, speaking to Business Line in early May about acquisition prospects for Wipro.

Within a month after this statement, in early June, rumours were swirling in the media that Wipro was close to striking an agreement for buying out either Sapient Corp or Keane, two US based e-consulting companies. This was denied by Wipro immediately, although it said it will pursue its strategy of selective acquisitions of IT companies. Thus it has once again unwittingly activated the rumour mills which had hounded Infosys Technologies over its possible acquisition of Cambridge Technology Partners some time ago.

These rumours have also provoked another question. Is it an opportune time for Indian software companies, specially frontline companies, to make acquisitions? There is no simple answer to this question. From a practical standpoint, Indian frontline software companies are now grappling with the following issues in deciding on an acquisition:

* US slowdown and its impact: Before any frontline company makes an acquisition, it has to make a call on the timeframe over which the US economy, particularly the tech sector, will recover from the downturn. Layoffs, reduction in capital expenditures and the wave of adverse news from the PC, hardware, networking and telecom segments in Q2 indicates that the US economy recovery may extend beyond Q4 of 2001. This call is critical as acquisitions by Indian companies are likely to be dictated by either the need to move up the software value chain, capitalise on an established brand or acquire new clientele. And in all three, the success of the acquisition will hinge upon the resurgence in capital spending on IT and the resulting productivity gains.

The puzzle over capital spending on IT versus productivity gains has to be first resolved. The Federal Reserve and the US Government have consistently held the view that productivity gains had powered the sharp growth of the US economy in the mid to late nineties, keeping inflation and business cycles under check. In order to reinforce this view, the Federal Reserve had commissioned a key research study to evaluate the contribution of IT to productivity growth.

Conducted by Stephen D. Oliner and Daniel E. Sachel, this study titled, ``Resurgence of Growth in the late 1990s - Is Information Technology the story?'' concluded that, ``we estimate that the use of IT and the production of computers accounted for about two-thirds of the 1 percentage point step-up in productivity growth between the first and second halves of the decade.''

Just as the investment in H1 of the 1990s contributed to productivity gains in H2, the Federal Reserve is banking on IT spending to effect huge efficiency gains in the early part of this century, contributing to a speedy recovery of the US economy.

So far, the spending by old economy brick-and-mortar giants has sustained the business spending in IT, but if the US economy slips into a severe recession and these companies face a financial crunch, the sustainable recovery in IT purchases may take much longer than is estimated currently. Before any of the Indian companies put through an acquisition, it is critical for them to make a bold call on the US recovery and articulate their impression clearly to the investing public.

* Consulting/vertical domains in transition: Most strategic acquisitions contemplated by Indian frontline companies are likely to be in the e-consulting space. But consulting companies have been the worst hit in this US slowdown and may be among the last to recover. Moreover, most e-consulting companies, even the big names such as Sapient, Scient, Keane or Viant, are finding the going extremely tough and are currently involved in restructuring operations in a big way. Similarly, iXL, Organic or Xpedior are awaiting significant cash infusions to save themselves from liquidation.

* Strategic investments/alliances: Although Infosys Technologies suffered some reverses recently in its strategic investments made over the past couple of years, the underlying rationale surrounding strategic investments/alliances continues to remain fairly strong. Infosys had to make provisions in its books for investments made in EC Cubed, a US-based provider of B2B e-commerce solutions and Alpha Thinx Mobile, a Vienna-based company operating in the wireless Internet space, which filed for liquidation. Besides these, Infosys has made strategic investments in half a dozen other ventures, currently in operation.

HCL Technologies has also made investments in five technology funds focussed on funding emerging technologies and enhancing geographic spread. From a company's perspective, it is important to evaluate strategic alliances/investments versus straight acquisitions by Indian frontline companies from the standpoint of:

* Achieving predetermined goals: In a highly networked world, most strategic alliances are aimed at a set of predetermined goals. These may vary from increasing market penetration by expanding into new markets or enhancing presence in existing markets, new product development, garnering technical or vertical segment expertise to moving into new segments such as supply chain management, customer relationship management or office automation functions.

* Acquisition vehicle: If the evolution of an alliance is planned, it can prove to be a good acquisition vehicle. By making strategic investments in a phased manner, an alliance or partnership can eventually culminate in an acquisition of the alliance partner.

* Uncertainty in market access or technology: When the uncertainty associated with market access or technology or operating standard is high, a company may commit to the launch of several strategic alliances at the same time. In time, it can determine which ones are worthy of further investment and which aren't.