Rationale Behind Mergers and Acquisitions

By Indian IT Companies

Prepared by :
Syed .A. Rahman
 Executive Summary
• Mergers & Acquisitions (M&A) are the flavor of the season in IT industry. Right from small startups to well
established big firms, the inorganic route has become one of the growth strategy
• IT companies are different from other industries, hence traditional rationales are not the right measure for
them. Growth happens in this industry when companies receives new projects through new clients or
additional work from existing clients. In these growth scenarios the most important strategic rationales are
economics of credentials and economics of relationships
• Economics of credentials - By combining credentials of the two firms, the probability to get new client
increases versus the individual probabilities of getting client based on independent credential by each firm
separately; this is known as economics of credentials
• Economics of relationships - By combining two firms, the probability of getting additional work
leveraging combined client relationships increases versus the individual probabilities based on leveraging
individual relationships of getting additional work by each firm separately; this is known as economics of
relationships
• Companies select IT service providers on the bases of following credentials
• Financial credentials
• Capability credentials
• Client credentials
• Geography credentials
• The Polaris-OrbiTech merger saw a spurt in the merged entity’s revenues from $60 million to $125 million.
The merger also added 1,400 employees to Polaris, taking the total employee strength to 4,000. Hence it
improved its Financial credentials and Capability credentials
• The acquisition of China-based Navion software helped Mphasis BFL increase its employee strength by
85 people and expand its business in the region. Hence the acquisition improved its Client credentials,
Capability credentials, Geography credentials and leveraged the Economics of relationships
• M&A helps in improving these credentials for the combined organization. Hence organizations can
leverage Economics of credentials as well as Economics of relationships
Source: “M&A: What motivates Indian companies”, 7 April 2003, 16 December 2007, <
th th

http://www.expresscomputeronline.com/20030407/indtrend1.shtml>
Traditional rationales are not the right measure for IT companies

Mergers & Acquisitions (M&A) are the flavor of the season in IT industry. Right from small startups to well
established big firms, the inorganic route has become one of the growth strategy.
IT companies are different from other industries, hence traditional rationales are not the right measure for
them.

Economics of scale Talent acquisition

Combined average unit cost decrease by
combining two firms. It generally happens in high
capital intensive industry where fixed cost can be
leveraged over much larger production units.
IT companies doesn't have much advantage from
this rationale except some advantages due to
location, infrastructure, software and hardware.
Economics of scope
The combined support cost like sales force can
decrease by combining two firms. It generally
happens in FMCG companies, where huge sales
force can be combined and rationalized.
For IT companies this is not the case, as they
depend upon projects.
Due to high attrition rate in market, talent is easily
available and can be recruited by giving premium
from market, the way many MNC’s did, therefore it
is hardly a compelling strategic rationale for an
acquisition.
New growth avenue
That can happen in a saturated industry where a
major growth can happen only by acquiring
another major player. The IT industry is still a
sunrise industry and far from getting mature.
Time required to built and ramp up
Many of the IT firms are recruiting greater than
10,000 employees in a year so this is hardly a
compelling rationale for acquisition.

Source: “Strategic rationales for the M&A in IT & BPO service providers”, 28th May 2007, 15th December 2007, <
http://thinkingstreet.com/business/2007/05/28/stretegic-rationale-for-ma-in-it-bpo-service-providers/#more-644>
 Growth in IT industry
In order to understand the strategic rationale for M&A in IT industry, we need to understand how growth
happens in this industry and what M&A drivers can help in this growth.
Growth happens when company gets new projects.

Growth

New Client Existing Client

New Work Additional Work

Economics of Economics of
Credentials Relationships

Economics of Credentials Economics of Relationships

By combining credentials of the two firms, the
probability to get new client increases versus the
individual probabilities of getting client based on
independent credential by each firm separately;
this is known as economics of credentials.
By combining two firms, the probability of getting
additional work leveraging combined client
relationships increases versus the individual
probabilities based on leveraging individual
relationships of getting additional work by each firm
separately; this is known as economics of
relationships.

Source: “Strategic rationales for the M&A in IT & BPO service providers”, 28th May 2007, 15th December 2007, <
http://thinkingstreet.com/business/2007/05/28/stretegic-rationale-for-ma-in-it-bpo-service-providers/#more-644>
 Relevance of Economics of Credentials and Relationships
In order to see the relevance of economics of credentials and economics of relationships, we should look at
how a company selects IT service provider.

Procedure for selecting IT service provider

If the work is new then company typically follow through proper bid process.
• Information is collected from suppliers in form of RFI (Request for Information)
• Based on credentials of suppliers, few of them are short listed for RFP (Request for
Proposal) stage
• Based on RFP response, final supplier or suppliers are selected. Here along with price
and solution approach, the credentials are deeply evaluated to arrive at final selection

Credentials on which IT companies are evaluated

1. Financial Credentials: Revenue, Revenue in a particular industry vertical (BFSI) or a horizontal (HRO)
2. Capability Credentials: Number of people, skill sets (number of years of experience) in technology,
process, packages etc, number of people in different industry verticals or horizontals
3. Client Credentials: Number of Clients, Number of clients in different industry verticals or horizontals,
Number of clients in particular geography
4. Geography Credentials: Number of delivery locations in different geographies, number of people in
different geographies

M&A helps in improving these credentials of an organization.

Hence organizations can leverage economics of credentials as well as economics of relationships.
Source: “Strategic rationales for the M&A in IT & BPO service providers”, 28th May 2007, 15th December 2007, <
http://thinkingstreet.com/business/2007/05/28/stretegic-rationale-for-ma-in-it-bpo-service-providers/#more-644>
 Examples

Acquisition of an offshore company by MNCs are aimed at increasing

acquirer’s geography and capability credentials in offshore presence.
Acquisition of Mphasis by EDS, Acquisition of Kanbay by Capgemini,
Acquisition of Convansys by CSC.

Acquisition of niche companies in India by service providers. For example

Spectramind’s acquisition by Wipro, Marketics’s acquisition by WNS,
Inductis’s acquisition by EXL.

These are the examples of companies, who increased their capabilities and
client credentials in new services through acquisitions.

Acquisition of niche companies in abroad by service providers. Expert’s

acquisition by Infosys in Australia, Nervewire acquisition by Wipro in US,
Citisoft acquisition by Satyam in Europe.

These are examples of establishing client, geography and capability

credentials and to leverage some of the economics of relationships.

Source: “Strategic rationales for the M&A in IT & BPO service providers”, 28th May 2007, 15th December 2007, <
http://thinkingstreet.com/business/2007/05/28/stretegic-rationale-for-ma-in-it-bpo-service-providers/#more-644>
 Sources

“Strategic rationales for the M&A in IT & BPO service providers”, 28th May 2007, 15th December 2007, <http://
thinkingstreet.com/business/2007/05/28/stretegic-rationale-for-ma-in-it-bpo-service-providers/#more-644>

“M&A: What motivates Indian companies”, 7th April 2003, 16th December 2007, <http://www.
expresscomputeronline.com/20030407/indtrend1.shtml>