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Buy or build?

In this day of acquisitions, there is a danger that strategic fit of companies may be subsumed to shareholder demands, says Ganesh Natarajan.

india Updated: Oct 30, 2006 19:59 IST

The smooth transaction that saw one of the United Kingdom’s most venerable institutions British Steel - now Corus - move into the hands of the Tata group was remarkable in more ways than one. The generosity of the acquiring firm towards the employees and the unions, the general air of bonhomie that seemed to prevail between the Chairmen and CEOs of the respective companies and the very pragmatic approach taken by the British Government towards a very significant cross-border transaction, all were quite remarkable. But for me, the most significant statement was made when the Tatas said that this was not any move to compete with the Mittals, and that even if Corus had been a five million dollar firm with a good strategic fit they would have acquired it!

These days when Indian companies are seen as hungry predators in the acquisition game, and companies from every sector - not just IT - are lining up to grow their businesses through the inorganic route, there is a real danger that the need for strategic fit might be compromised at the altar of “bulking up” to meet stock market and shareholder push for faster growth.

In the software exports industry, there are some real reasons why acquisitions make sense and there are others too why multiple small deals have no long-term business logic whatsoever. To take the negative view first, every deal needs careful management, through the identification, consummation and assimilation process. The effort it takes to make a small acquisition work is often as much - if not more - than does a larger and more strategic deal; one wonders how medium sized companies can execute three or four transactions a year and still retain some modicum of focus in their business and alignment among their service lines.

The good news is that some acquisitions can actually be a much better alternative to slow organic growth if done in a niche competence area or in places like the European continent, Japan or Latin America. Though tactical in nature, these are steps in the right direction that the industry is taking in the last couple of years with every significant player having started to move in the M&A game.

Truly strategic deals have yet to be seen in any significant number in Indian IT companies. The Infosys acquisition of a consulting firm in Australia that catapulted them to a leadership position down under and the takeover of Mphasis by EDS may probably be the exceptions, while Tata Steel, Bharat Forge and Crompton Greaves, to name just a few, seem to be showing the way to market leadership in the size and scope of their M&A strategy and execution. Is it a case of the old economy stealing a march over the traditional trailblazers of Indian industry ? It’s too early to tell.

Ganesh Natarajan is Deputy Chairman & MD of Zensar Technologies Ltd.