Consolidation time?

As solution providers find it increasingly difficult to grow organically, is
consolidation of business through mergers and acquisitions the best way to stay
in the race and grow, especially during slowdown?

With the exposure to the financial downturn increa­sing, for the companies
that are in IT services and solutions space, it is increasingly becoming
difficult for them to maintain their growth. During downturn, IT expenses are
the first to be axed by companies due to the increasing financial crunch.
Therefore, the question before most solution providers is how to survive in
absence of organic growth?

Right Time?

One question that pops up, when we talk about consolidation is whether this
point of downtime is a healthy period to opt for it. The solution industry saw
few instances of business consolidation in terms of M&As in the past six months,
partially as people looked inwards in a bid to control costs and remain
profitable.

But there are those who bucked the trend. Chandan Joshi of Pune-based Phoebus
Technologies feels that slowdown is the best time to go for consolidation. His
company merged with Pune-based Vintech Electronic Systems some months ago. “We
opted to merge especially at this point of time considering the significance of
the operational costs of both the companies and providing complete solution to
the customers,” Joshi said.

Consolidating with other companies to offer wider technical options to
customers is sensible. Nitin Shah of Allied Digital Services too strongly
recommends consolidation during slowdown to meet customer expectations.

Allied Digital too acquired 100 percent stake in Bengaluru-based SAP
Consulting and Support Services Provider En Pointe Technologies India sometime
ago. “This acquisition would help us to complete a vision of total end-to-end
services for remote data center support including business applications,” Shah
averred.

Joining to grow

Another merger that raised the eyebrows during the time of slowdown was the
joint venture floated between Pune-based

Sunfire Technologies and Concept Information Technologies under the name of
Green IT Solutions, which would act as the company's vehicle in expanding the
business across the country.

Sanjay Kulkarni, CEO, Sunfire Technologies claimed that the complementary
solutions that existed between both the companies made this merger possible.
“Sunfire is strong in virtualization, networking and datacenter solutions, and
has a strong customer base in ITes and manufacturing, while Concept is
specialized in HPC and storage solutions for different verticals ranging up to
defense verticals.

The merger has given us a technical skill-set and a broader customer base,”
Kulkarni claimed.

Unless there is some unique or appropriate solution available, and there is enough cash flow, nobody will go for consolidation Nitin Shah Allied Digital

For V Murali, CEO, Precision Infomatics, slowdown is an opportunity for
companies to consolidate their business. “Not in a position to expand their
operations, they would be restricted to limited exposures. In this scenario, it
makes sense for the companies to go for consolidation in their business through
which they can find new opportunities,” he said.

cash flow counts

RS Shanbhag, CMD, Value Point Systems, Benguluru is surprised to hear about
the number of consolida-tions happening across the solution provider community.

However, he felt that if there is definite requirement and availability of an
appropriate solution, then the right time to go in for consolidation for a
company that has cash flows.

Today, even if a company is ready to buy, the other company's due diligence
on their value is preventing the consolidation from taking place. “A year back,
the valuation of the companies ranged from 7 to 9x of EBITDA which has today
come down to 2.5 to 3.5x of EBITDA,” Shanbhag pointed out.

other options

Should a solution provider consolidate his business by acquiring new skill
sets and filling his product portfolio gap or should he rather develop on his
own? Murali completely disagrees with the thought.

He claims that business consolidation is the best way to acquire new
technical skill sets and enhance the existing product portfolio.

“Indigenous development is a lengthy process. By the time one completes the
process, some other competitor would have established himself in the market.
Moreover, investment in people, property and processes could be really high and
suddenly if a resource quits after focused training, the whole process could be
stalled. So it is always better to go for business consolidation rather than
building the skill sets indigenously,” Murali opined.

Nitin Shah echoes Murali's thoughts on need for consolidation. “This is a
fast industry and the clients' requirements have to be met immediately. It will
take a huge amount of time for a company to build its own solution and by that
time the opportunities may be lost. Losing opportunities in slowdown can't be
ideal,” claimed Shah.

However, Sairam Mudaliar, CEO, Pentagon Systems, Mumbai felt that only cash
rich companies can go for acquisition of complementary technologies and others
need to build them on their own. “It makes sense to build in your own solutions
rather than go for technologies that are built by some other company. At this
point of downtime, when cash is highly important for any company to survive, one
should try to build one's own team and skill sets rather than invest in some
solution whose future is not known,” he said.

Who should consolidate?

It is advocated that those companies that have good cash resources and are
looking for deep penetration among the customers should opt for consolidation.
Apart from these, companies that are struggling for their survival should
consolidate their business with another that is fundamentally strong, cash rich
and has a good customer base.

Chandan Joshi of Phoebus Technologies felt that companies that are finding
day-to-day survival difficult to handle must strictly go for consolidating their
business by getting acquired. “Instead of losing the technical resources that
the company has built with so much effort, it can opt for consolidation through
M&A,” Joshi said.

Dharmesh Anjaria of Dynacons Systems and Solutions, Mumbai said, “Those who
are looking out for specific geographic expansions must utilize this opportunity
by acquiring the companies of their specific areas of interest,” Anjaria
explained. Dynacons too is looking to acquire companies in the services and
security space.

Considerations

To make any alliance work, both companies that are merging together must
have clarity on the objective of their merger preferably in the immediate
future. Atul Bansal, MD of Silicon Integrix, New Delhi agreed that the objective
should be the main driving force behind the decision to consolidate.

“If the objective of acquisition is market consolidation then SPs should wait
till the market is back to positive growth. This would help them in meeting
their objective profitably. On the other hand, if the objective is just to merge
and acquire then it can be done any time and one need not wait for the market to
perform better.”

Shah of Allied Digital felt that the focus of the companies must stay in
their core areas and any deviation in that respect wouldn not allow the
companies to reap the benefits of consolidation.

With majority of the solution providers scouting for right kind of solutions
in order to fill the gap existing in their solution portfolio, who are
struggling to survive with inherent values and strong skill sets can look
forward to consolidate their business with them for providing end-to-end
solutions to customers.

NR Sethuraman

Sethuramannr@cybermedia.co.in

with inputs from Amrita Tejasvin