Small IT firms scale up with M&As
Now, smaller IT companies in India are bidding to get larger deals and retain employees.
By R Raghavendra & Rajesh Chandramouli, TNN |
BANGALORE/CHENNAI: Size matters. And no one seems to have understood this better than those hundreds of small and medium IT enterprises. Determined to grab a bigger piece of the action on deal street, smaller IT companies in India have taken to inorganic growth in a big way, many of them acquiring entities as big as themselves.
The big players today bag most of the large deals that come India's way, and smaller IT players realise that scaling up is the only way to get there. Many also feel that size matters for the sake of keeping their talent pool intact, because employees tend to be attracted to the big names in the industry.
| The big players today bag most of the large deals that come India's way, and smaller IT players realise that scaling up is the only way to get there. Many also feel that size matters for the sake of keeping their talent pool intact, because employees tend to be attracted to the big names in the industry. |
"Initially , we were happy with doing high-end work for our clients. The margins were much higher there. But, more recently, we decided to revisit our strategy, and felt that we need numbers in the balance sheet," says J K Nair, COO of Chennai-based IT services company California Software (Calsoft). "The best way we could do that was to look at acquisitions . Therefore, we stepped on gas." Calsoft has acquired as many as half a dozen companies in the past couple of years.
Hyderabad-based Four Soft, which specialises in transportation, logistics and supply chain management, concluded two acquisitions last year -- DCS Transportation and Logistics Ltd of the UK and Singap o re - b a s e d Comex Frontier Pte Ltd. It is learnt that the company is now working at completing two or three more acquisitions over the next one year.
Even start-ups are no exception . Enzen Global commenced operations six months ago with a focus on consulting. Traditionally , it is the bigger players who have set foot in this space. Big names always attract prospective consultants and it is for this reason that Enzen too is scouting for acquisitions.
Hyderabad-based Four Soft, which specialises in transportation, logistics and supply chain management, concluded two acquisitions last year -- DCS Transportation and Logistics Ltd of the UK and Singap o re - b a s e d Comex Frontier Pte Ltd. It is learnt that the company is now working at completing two or three more acquisitions over the next one year.
Even start-ups are no exception . Enzen Global commenced operations six months ago with a focus on consulting. Traditionally , it is the bigger players who have set foot in this space. Big names always attract prospective consultants and it is for this reason that Enzen too is scouting for acquisitions.
"Consulting is our bread and butter. In six months, we are already about 90-strong and are looking at revenues of $5 million in the first year. However, in order to hire good consultants it is important to constantly present to them a challenging environment and the opportunity in the world of niche consulting. So, we either emulate niche consulting firms worldwide or acquire them," says Satheesh Kumar, CEO of Enzen Global.
In September 2004, Bangalorebased Aztecsoft acquired software product-testing firm Disha Technologies by forking out $9.6 million in cash and $2.5 million in stock. That provided an opening for it in the testing services space. In the words of Aztec managing director V Chandrasekaran, the acquisition was "a strategic response to our customers' needs to manage rapid product development , while maintaining independence in testing."
Says Sabyasachi Satpathy, senior director at neoIT: "We are only now seeing real market consolidation. There is now a terrific need to have a certain size, scale of operations and the complementary capabilities across geographies to get work.''
In 2005, it is estimated that there were 94 M&As in the Indian IT sector. Of this, close to 60 deals were $5 million in size.
The geographic presence and, more importantly, the ability to be able to service clients from a near shore location makes acquisitions all the more enticing.
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This has been the case for Sobha Renaissance Information Technology (SRIT), another small IT firm.
SRIT acquired the healthcare division of Kale Consultants in February 2004.
This all-cash deal enabled SRIT to enhance its own product basket in the healthcare division to specifically address two and three tier hospitals in India and the rest of the world. Recently, in a multimillion euro acquisition, SRIT lapped up Munich-based Billing Components AG, thus strengthening its offering in the telecom space.
This acquisition brought in marquee customers like T-Mobile , Eronet, Vodafone-Si .mobil and Cosmoron. The market for third-party telecom software and services is expected to reach $4 billion in 2006 and grow to $11.5 billion by 2009.
This is the opportunity that awaits SRIT.
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