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Missing: Killer M&A in IT services

Our Bureau

MUMBAI, Feb. 8

THE Indian software industry is waiting for one key cross-border acquisition to catalyse a flurry of activity within the software services sector, according to Mr Crawford Jameison, Executive Director, Morgan Stanley Dean Witter.

Addressing a session titled ``Mergers, Acquisitions and IPOs'' at Nasscom 2001 on Thursday, Mr Jameison said that there were three attention grabbers which are expected to usher in the next step in cross border M&As (mergers and acquisitions).

The attention grabbers are that every global company must have an Indian engine, the value of Wipro (or Infosys) is greater than the value of all US digital consultants combined and US service stocks are 90 per cent off their historical highs.

Although there has been a fair bit of consolidation through technology M&As over the past year or so, none of the big-ticket mergers such as AOL-Time Warner and Verisign Network Solutions and JDS Uniphase SDL have been in the IT services space.

The IT services space badly needs a ``category killer to set off a spate of M&As within the sector.''

However, he added, the trigger may have to come in the form of a cross-border M&A, which may pave the way for domestic consolidation.

Outlining the shape of things to come, Mr Jameison said that Indian software companies have a wide array of internet consultants, network consultants, strategy consultants, software tool players, hardware companies and traditional systems integrators (na mely the Big Five) to pick and choose as potential targets.

However, each of these M&A propositions presents a range of alternatives and key issues which may have to explored in depth by Indian companies before taking a plunge, he added.

Mr Nandan Nilekani, Managing Director, President and COO of Infosys Technologies, highlighted that the principal objective surrounding an acquisition should be maximising shareholder value.

But he added that the acquirer should not lose sight of the secondary objectives such as preservation of operating synergies, margin sustenance, per-hour rates improvement and ensuring that the whole (after the M&A) is greater than the sum of the parts i n the exercise.

Breaking the acquisition into a three-stage process involving strategic evaluation or assessing the potential value of the target, due diligence or reviewing valuation and addressing the post-integration cultural issues, he said that the acquirer has to take extraordinary care in handling each of these stages.

Reinforcing the theme, Mr David Weaver, Head, European Technology Investment Banking, DB Alex Brown, said that globalisaton, vendor consolidation, skill shortage and the pace of technological change are setting the stage for consolidation within the soft ware services industry.

Going forward, the churn in the business models among industry players may also hasten and spur acquisition activity within the sector.