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Expect more M&A in IT

india Updated: Jan 25, 2009 20:52 IST
N Madhavan
N Madhavan
Hindustan Times
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Boom times make everyone appear a winner, and only during times like the current phase of a global recession and a local slowdown that the men are separated from the boys. I like to joke that in boom times, all companies in a sector seem to be doing great, somewhat like Himesh Reshammiya's songs: all sound the same and all are hits!

These thoughts come to me after a week that saw iGATE and HCL Technologies becoming possible suitors to buy part or whole of beleagured Satyam Computer Services. With or without the Satyam fraud, I have been thinking that the time is ripe for industry consolidation in India's IT services sector, because we have had too many companies, big and small, saying similar stuff and taking money from the capital market.

Evolution demands that mergers and acquisitions take place in the industry to give size, specialisation and scope to companies. We already have giants in Infosys, Tata Consultancy Services and Wipro that have scale and brand. But, starting a rung or two lower, we have what I call the "Long Tail" of IT services. Just how long can customers, employees and shareholders hear similar sounding gospel with some market positioning here and there?

There is a compelling market logic now to create value by some hot M&A and I suspect the Satyam crisis has only accelerated a movement that was waiting to happen.

M&A is not new to the industry, but in the past has focussed on the acquisition of overseas companies by Indian giants, the latest and the biggest being HCL Technologies buyout of Europe's Axon. At home, we have seen MphasiS BFL sell out to US-based giant Electronic Data Systems and iflex to Oracle.

Though the digestion of acquisitions is difficult and mergers tough to execute, the simple fact is that the industry is crying out for a round of sophisticated reorganisation based on industry specialisation, size or efficiency in lowering costs or improving pricing power.

For example, why should Tech Mahindra and Sasken, both of whom specialise in telecoms, be separate, glorified boutiques in the offshore operations from India?

Smart investment bankers (the ones who have not lost their jobs in the recent meltdown) should now be thinking of doing deals that make sense to shareholders of IT service companies to execute deals that bring top class managements to poorly run companies and create efficient operations based on locations, customer relations and industry (domain) specialisation. I expect promoters sitting on plum CEO jobs and sentiments associated with being founder-entrepreneurs to think of the long term.

Will they do it? The smart ones should. Selling shares in IPOs is no different from marketing toothpaste, if you know what I mean.