Shake-up on the anvil?

While the SSI-Aptech merger is being touted as the biggest
coup in the Indian IT education market, will the Rs 40-crore deal really shake
up the sector?

Though nothing is yet official about the Chennai-based SSI
plans to acquire majority stakes in Aptech Training, the country's leading
financial dailies have already made the basic details public. There isn't enough
reason not to believe them either; from the initial strong denials made by
Aptech's Pramod Khera, the responses have gone weaker by the day. While SSI's
general manager for corporate communication initially rubbished the news as
"purely market rumors", he went on to add that, "At this point of
time we are not in a position to disclose any further details". Similarly,
after the initial expression of unawareness about any such developments, to
denial of any such move, the Aptech corporate communications team finally said
that, "announcements, if any would be made at an appropriate time".

The Deal

Touted as the biggest coup in the Indian IT education market in the recent
times, the deal-if it comes through-will help the Chennai-based software and
training company SSI to acquire majority stakes in the Atul Nishar-promoted
Mumbai-based Aptech Training. According to the information available till the
filing of the report, SSI is likely to acquire 27.74 percent stake held by
Nishar in Aptech. Also, rather than a stock swap method, most common in such
deals, the two companies have agreed to an all-cash deal as the Aptech's
promoter wants to completely get out of the IT training business.

Beside paying around Rs 24.46 crore for 49,85,967 shares
held by Nishar, SSI would also have to make an open offer to acquire additional
20 percent stakes in Aptech as per the Securities and Exchange Board of India's
(SEBI) guidelines for takeovers. Given the current price trends of Aptech's
share price on Bombay Stock Exchange (BSE), SSI would also have to shell out an
additional Rs 16 crore as payout for the same. Strangely, while Kalpathi S
Suresh, chairman and CEO, SSI had suggested in 2002 that the company was
actively considering getting out of the IT training business as the Indian IT
industry has overcome the manpower crunch thereby making the business
unattractive, Aptech, throughout the troubled times, had been talking
positively. So what triggered the change of hearts?

Who gains what?

Notwithstanding the non-committal answer from both the companies, the
expected Rs 40.46 crore acquisition does makes sense for both the companies.
According to market observers, Nishar has been trying to get out of the training
business for quite sometime now and focus entirely on the software services
business. Not to forget that Aptech's software services business was demerged
from the training division in December 2001 and merged with another Nishar-promoted
company Hexaware Technologies. The training division was later registered as a
separate company and listed as Aptech Training.

A set of analysts believe that SSI's main reason to buy
Aptech can be its attractive global business proposition and given Suresh's view
on the domestic IT training market, it does not seem too far fetched either.
Consider this: Aptech's revenues from overseas operations jumped from Rs 12.12
crore in OND 2001 to Rs 46.08 crore in AMJ 2002 and 49.15 crore in JAS 2002-from
16.16 percent to 53.17 percent and 54.35 percent respectively. On the other
hand, Aptech has lost shine in the domestic segment-from Rs 83.83 crore in OND
2001 to Rs 45.64 crore in JAS 2002, thereby validating Suresh's comments on the
domestic market.

Reports also suggest that the merger might give a new lease
of life to SSI as its revenues have taken a severe blow in fiscal 2001-2002,
which it ended with Rs 328 crore, a fall of 23 percent compared to the previous
year (2000-01), which saw growth rate soaring to 168 percent. Meanwhile the
company's education revenues stood at Rs 21 crore in Q1 (JAS), 2002-03. While Q2
results are not yet out, but sources say that the worst is over and IT training
industry as a whole is on a consolidation phase. For instance, the company still
has around 750 centers and enrollments have actually increased to 32,806 in Q1
2002-03 compared to 32,753 the previous quarter. With revenues and enrolments
stabilizing after steep decline, the merger with Aptech would help SSI to
further consolidate itself.

Sources also suggest that after the takeover SSI is likely
to retain both the brands and leverage from their core strength. While SSI is
considered a top brand in the short-term emerging technology courses segment,
Aptech is a more powerful brand in long-term courses. This brings a natural
synergy with the former being a major player in courses related to emerging
technologies such as networking, e-business, client-server technologies and
bio-informatics, while the latter enjoying a significant share in the market for
long-term courses. SSI would also benefit from Aptech's footprints across the
world-2199 centers in India and 250 centers across the globe. The company also
operates on a bi-pronged strategy-one caters to the IT education and training
segment the other focused on multimedia. For the financial year ended 2002, the
company garnered 85 percent revenues from IT training and 15 percent from its
multimedia training. The possible synergy in terms of delivery and reach of the
combined entity is also expected to be huge and the IT education market, which
is triangular at present with NIIT on top followed by Aptech and SSI, will
become bi-polar.

But there are more thorns than roses as it might appear
from just a simple revenue-to-revenue comparison of the merged entity and NIIT.
While the deal might bring the combined strength of the two much closer to
NIIT's 27 percent market share-between SSI and Aptech the market share is likely
to be in the range of 27 percent squaring it off with NIIT in the Rs 1,600-crore
industry-a quick look at the quarter-to-quarter growth of the three companies
throws an all together different picture. While the #1 player, NIIT, has been
registering constant revenue growth-from Rs 74 crore in OND 2002 to Rs 81 crore
in JFM 2002, Rs 92 crore in AMJ 2002 and Rs 121 crore in JAS 2002-the #2 and #3
players have posted flat growth. In fact, SSI suffered a 32 percent negative
growth in JFM 2002-from Rs 31 crore in OND 2001 to Rs 21 crore and has just
managed to retain those figures in the next two quarters. Similarly, after
registering 11 percent growth in JFM 2002-from Rs 75 crore the previous quarter
to Rs 83 crore-the company has only marginally grown in the next two quarters-by
5 percent and 3 percent respectively. While one may also like to believe that
the new entity might be able to overcome these hurdle to emerge a lean and mean
machine, given the size of the joint company the transition may stretch to over
six months. And this period of uncertainties can actually see the SSI-Aptech
combine lose more market share than what they can gain-reversing which would be
another arduous task that Suresh & Co would have to manage.

Shubhendu Parth & G Shrikanth

(CNS)