“Big-ticket” M&A in Indian IT ordinarily have several objectives, but
three are most often articulated: (1) introducing or raising growth profile in a
distinct, altogether new function (vertical/horizontal/geography), normally the
more immediate payoff; (2) cross-synergizing, which is selling the acquired
capability into the broader base of the acquirer’s existing clients and the
acquiring firm’s existing capabilities into new clients from the acquisition to
boost the acquirer’s organic growth prospects; and (3) achieving sufficient,
scalable offshore flow-through (or downstream) over time to scale and break
even on margins (this applies to acquisitions made onsite). Items 2 and 3 are
typically longer-term aims, much harder to realize, as well, as they entail
integration of the target into the acquirer’s mainstream. This has proved a
torturous agenda, as integration can easily undermine the culture,
processes and identity of a target, which defeats the logic of the acquisition.
We find that most, if not all, large M&A fails at Items 2 and/or 3. Highprofile acquisitions that have delivered significantly below expectations, in our
view, include Info-crossing (acquired by Wipro in Aug-07 for US$600mn),
Oracle’s acquisition of i-Flex (stock price of Oracle Financial Services
motivated more by technical factors such as delisting) and, to a lesser extent,
Axon (acquired by HCLT for US$658mn in Dec-08). Info-crossing has not
consolidated Wipro’s then-leadership in infra-management (if anything,
TCS/HCLT has taken over leadership in infra-management in the last two
years). The financial products business at OFSS has been languishing for a
while now, growing at just single digits in percentage terms. AXON has not
helped HCLT grow enterprise solutions (SAP/Oracle solutions) ahead of peers,
though AXON has helped HCLT sell its core infra-management services to its
(AXON’s) clients.
In an attempt to preserve the distinctiveness of the target and also as part of
learning from the shortcomings of previous M&A integration efforts, many
acquirers are delaying the integration of targets into the mainstream, which we
see as prudent. This might postpone the synergy gains, but if doing so minimizes
risk of the M&A going wrong, it might be well worth it.
Historically, the market has been initially skeptical of larger mergers of
listed entities, especially mergers involving a company merging into a
smaller/comparably sized one (e.g., Patni-iGate or Tech MahindraSatyam). We find that it can be 12-18 months after a merger announcement
that tangible value emerges (if it happens) for the investor, as the acquirer
sets about tackling the initial burden-of-proof (we have seen this with the
TechMahindra-Satyam merger, for instance). Investor interest in stocks of
companies involved in a merger emerges only at very reasonable valuations,
when merger/acquisitions risks are more than adequately priced in. Such a point
may be reached after a period of significant stock underperformance following
the merger announcement.
We would temper buoyant expectations of significant acquisition(s) or
merger(s). The feel-good factor that the prospect of a large acquisition
sometimes induces may be more psychological and may not square with the
subsequent track record, as our analysis suggests
three are most often articulated: (1) introducing or raising growth profile in a
distinct, altogether new function (vertical/horizontal/geography), normally the
more immediate payoff; (2) cross-synergizing, which is selling the acquired
capability into the broader base of the acquirer’s existing clients and the
acquiring firm’s existing capabilities into new clients from the acquisition to
boost the acquirer’s organic growth prospects; and (3) achieving sufficient,
scalable offshore flow-through (or downstream) over time to scale and break
even on margins (this applies to acquisitions made onsite). Items 2 and 3 are
typically longer-term aims, much harder to realize, as well, as they entail
integration of the target into the acquirer’s mainstream. This has proved a
torturous agenda, as integration can easily undermine the culture,
processes and identity of a target, which defeats the logic of the acquisition.
We find that most, if not all, large M&A fails at Items 2 and/or 3. Highprofile acquisitions that have delivered significantly below expectations, in our
view, include Info-crossing (acquired by Wipro in Aug-07 for US$600mn),
Oracle’s acquisition of i-Flex (stock price of Oracle Financial Services
motivated more by technical factors such as delisting) and, to a lesser extent,
Axon (acquired by HCLT for US$658mn in Dec-08). Info-crossing has not
consolidated Wipro’s then-leadership in infra-management (if anything,
TCS/HCLT has taken over leadership in infra-management in the last two
years). The financial products business at OFSS has been languishing for a
while now, growing at just single digits in percentage terms. AXON has not
helped HCLT grow enterprise solutions (SAP/Oracle solutions) ahead of peers,
though AXON has helped HCLT sell its core infra-management services to its
(AXON’s) clients.
In an attempt to preserve the distinctiveness of the target and also as part of
learning from the shortcomings of previous M&A integration efforts, many
acquirers are delaying the integration of targets into the mainstream, which we
see as prudent. This might postpone the synergy gains, but if doing so minimizes
risk of the M&A going wrong, it might be well worth it.
Historically, the market has been initially skeptical of larger mergers of
listed entities, especially mergers involving a company merging into a
smaller/comparably sized one (e.g., Patni-iGate or Tech MahindraSatyam). We find that it can be 12-18 months after a merger announcement
that tangible value emerges (if it happens) for the investor, as the acquirer
sets about tackling the initial burden-of-proof (we have seen this with the
TechMahindra-Satyam merger, for instance). Investor interest in stocks of
companies involved in a merger emerges only at very reasonable valuations,
when merger/acquisitions risks are more than adequately priced in. Such a point
may be reached after a period of significant stock underperformance following
the merger announcement.
We would temper buoyant expectations of significant acquisition(s) or
merger(s). The feel-good factor that the prospect of a large acquisition
sometimes induces may be more psychological and may not square with the
subsequent track record, as our analysis suggests