M&As: Tread with caution

Krishnan Thiagarajan

THE past couple of years has been an eventful phase for medium-sized companies in the software industry.

The competitive churn that began in this segment two years ago in the form of IPOs, acquisitions, hive-offs and restructuring have intensified over the past year. Realising the inherent limitations of organic growth, medium-sized software companies have been quick to seize acquisition opportunities on a large scale. The year 2000-01 was a highly instructive, with the industry witnessing `highs' and `lows' in the acquisition process. The acquisitions put through in 2000 and 2001 were mainly driven by the need:

*To bolster revenues by acquiring an established client base;

*To use offshore capabilities to offer customers a cost-effective solution;

*To broadbase/enhance existing vertical domain expertise or enter new verticals;

*To gain access or strengthen their presence in new geographic markets such as Europe and the Asia-Pacific;

*To offer more value-added services such as e-commerce or move up the value chain by entering into Internet consulting.

The key acquisitions put through by medium-sized companies last year had aimed to achieve some or all of the objectives outlined above. Some of them are:

*Among medium-sized companies on the acquisition front, Silverline Technologies has probably been the most aggressive. In 2000, it acquired CIT Inc, Sky Capital International (its second largest client prior to acquisition) and SeraNova Inc (to add strategy consulting to its software development activities). It is now evaluating the acquisition of CTC Corporation, a New Jersey-based IT solutions company.

*SSI has evolved a growth strategy for SSI Technologies, its software and services division, through a series of acquisitions. Following its acquisition of Indigo Technologies, 3rd Agenda and InddSoft in 1999, SSI announced its biggest acquisition to date, of US-based Albion Orion for $65 million, in September 2000. SSI proposes to offer offshore capabilities to Albion Orion's premium clientele, to whom it currently provides Internet/e-business, SCM and CRM expertise. This acquisition is expected to complement SSI Technologies domain skills in telecom, healthcare and insurance.

*Mascon Global has also been fairly active in the acquisitions arena. In early 2000, Mascon announced

the acquisition of Synergy Soft Solutions, International Software Consulting and Pondarosa Technologies, aimed at bringing banking, manufacturing and distribution expertise. Kicking off a new trend in terms of the acquisition of domestic companies, in March 2001, Mascon Global announced a merger with Maars Software International, but called off the merger, at the Board Meeting of the two companies on July 18, citing poor stock market conditions.

*There were a host of other acquisitions such as Aptech's acquisition of the US-based SpecSoft Consulting in July 2000, Trigyn Technologies' acquisition of Applisoft Inc, US, in April 2000, and Maars Software's acquisition of Technical Direct, UK, and Company Benelux, Belgium, in March 2000.

Prima facie, these moves to acquire medium-sized software companies were initiated with specific objectives in mind. However, in the course of their execution, several issues/problems have come to the fore. Some of these issues demand the attention of the shareholders:

*Integration issues: The success of an acquisition lies in handling complex integration issues associated with the acquisition within a prescribed time frame. Given the fact that acquisitions have been a new experience for medium-sized software companies in India, quite a few of these acquisitions have been bogged down by post-acquisition integration and restructuring issues. To some extent, this has led some of these companies to perform indifferently for a few quarters in the post-acquisition phase.

For example, in a recent SEC filing, Silverline Technologies indicated that the integration with SeraNova had been complex and time consuming. Silverline has also added that its financial performance could be affected if the operations of SeraNova were not integrated quickly. Other acquisitions such as SSI's acquisition of Indigo Technologies, BFL's acquisition of MphasiS and Leading Edge Systems takeover of eCapital Solutions have also had several integration issues that had to be ironed out before the acquisition could start yielding the desired dividends.

*Low clinch to completion rates: While medium-sized companies have been quick to identify and clinch acquisition targets, the rate of completion/consummation have been fairly low. The consummation rates have dropped sharply in recent times mainly due to improper due diligence processes and poor market conditions.

For example, after proceeding with its acquisition of the New Jersey-based Data Inc to an advanced stage last year, Polaris Software called it off citing objections raised by its audit committee. However, Data Inc's promoter has filed a lawsuit against Polaris in the US on the grounds that the latter had reneged on the terms and conditions of the acquisition agreement.

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Similarly, the acquisition of San Vision Technology initiated by DSQ Software in July 2000 appears to be hanging fire over purchase considerations. At the time of the initial agreement, DSQ Software had planned to pay $30 million in an all-stock deal to acquire San Vision. Following a deterioration in market conditions, DSQ has been attempting to renegotiate the agreement's terms, but has not made much headway. San Vision has claimed that the deal has been called off, while DSQ has held that the deal is still being renegotiated. In a related development, SEBI has asked DSQ Software to cancel its acquisition of US-based Fortuna Technologies over alleged irregularities in the acquisition process. DSQ Software has also been barred from accessing the capital market for another year.

Owing to the complex and dynamic nature of the software industry, it may be desirable for SEBI to make it mandatory for companies planning an acquisition to declare overriding acquisition `objectives'. In addition, in the interests of encouraging good corporate governance, it may also consider making mandatory the following minimum disclosure requirements on acquisitions to help shareholders make meaningful investment decisions:

*Sharing of vision among the two companies;

*Cultural compatibility;

*Geographical and other synergies;

*Short-term/medium-term plans for retention of manpower;

*Antecedents of the acquired company -- minimum information on revenues, employee profile, key focus areas and projected revenues and post-tax earnings;

*Existing clientele and how the synergies will drive future client profiles;

*Total outlay (cash or stock swaps, or a combination of the above) for the acquirer;

*Risks -- short- and long-term;

*Continuing disclosures on the execution/integration of the acquisition by the acquirer.