By Mukta Malhotra

Mergers and acquisitions (M&As) are on in the Indian software industry. Last year, more than 32 companies went to town about their intentions to make some acquisition or other. Between April and December 1999, as many as 17 Indian software companies set rolling the M&A juggernaut in some form overseas.

Who in the Indian software industry is looking at M&As as instruments of inorganic growth? Indian software industry circles are abuzz with the info that the top 20 software companies are actively looking at acquisitions. Biggies such as Infosys Technologies and Tata Consultancy Services (TCS) are on the prowl for acquiring companies.

Consider what other players are up to. To fund its global acquisitions, Silverline Technologies is planning to raise US $130 million through an ADR issue. The Bangalore-based Sonata Software too is looking at takeover possibilities. Says B Ramaswamy, managing director and president of Sonata Software: "We are looking at some kind of acquisitions for fuelling growth over the medium-term." New Delhi-based software major NIIT is also looking around to identify companies wherein it could make strategic investments and take controlling stakes. NIIT is in the midst of negotiations with a few willing suitors.

Overseas acquisitions
The raging mergers and acquisition mania has caught the fancy of not only Indian software majors, but has bewitched even the small and medium players. For instance, Cyberspace Infosys, a Mumbai-based Rs 40-crore software services firm, is planning to acquire a US-based software firm in a US $40 million stock-cum-cash deal. And then, Logix Microsystems, an Indian relationship management software company, has just bought-out the Singapore-based Midrange Solutions.

Yes, most of the companies that are getting acquired are overseas companies. "Many Indian software companies want to acquire such small software companies in the USA, which have huge client lists and special skills", says Dipankar Choudhury, vice president of ICICI Securities. Fine. But, acquisition procedures are still cumbersome and time-consuming. That does not seem to deter acquisition-hungry Indian software players.

What sort of companies are being targeted for acquisition? Says Ramaswamy of Sonata Software: "Many Indian software companies are looking at overseas companies with good market reach, strong domain knowledge and wide customer-base."

There are other advantages in acquiring a software company overseas too. Says Gul Tekchandani, chief investment officer of Sun F&C Asset Management: "Most of the Indian software companies are looking overseas for acquisitions because there is a Rupee-Dollar advantage". However, ICICI Infotech Services's acquisition objectives were different. This ICICI subsidiary has acquired the US $10 million New Jersey-based Ivory Consulting Group in a bid to gain an established base of clients, to get hold of marketing offices with customer relationship in the USA and to overcome barriers in getting H-1B visas for its Indian Staff.

Exploring tie-ups
Meanwhile, Indian software companies are in a hurry to become globally competitive and this is exerting immense pressure on them to respond to emerging challenges. That is why they are exploring tie-ups, strategic alliances and satellites abroad. The National Association of Software and Services Companies (Nasscom) is expected to launch sometime during September 2000 the third phase of its Project NIESA, which has so far helped in getting through 16 joint-ventures, 68 strategic alliances and more than 203 business contracts in Europe. Nasscom is also working on similar projects in Japan and other emerging markets.

One major factor that is goading Indian software companies to go for strategic alliances is implementation. The Singapore-based US $98 million Tibco has entered into an implementation alliance with ICICI Infotech Services for banking and financial sector software. While Tibco will market software products, ICICI will implement and provide services to high net worth clients. Says Kumar Subramanian, vice chairman of Silverline Technologies: "There lies an opportunity for companies to have strategic alliances with CRM-based companies for implementation." Other areas for tie-ups are also being explored by Indian software companies. For instance, Sonata Software has forged an exclusive tie-up with Scala for reselling its solutions in India.

Exploiting opportunities
The ongoing convergence of communications and information technology, coupled with the Internet phenomenon, is leading to a major paradigm shift. Need for complex technical skills in areas such as mobile-commerce and e-commerce is also forcing companies to go for strategic alliances and acquisitions. DSQ Software has forayed into e-commerce and has a strategic alliance with San Vision which has strengths in e-commerce solutions for the banking and insurance sectors. DSQ Software is also planning to acquire more front-end software companies.

There are more examples of such deals. Recently, the Bangalore-based Subex took over the New Jersey-based IVth Generation Inc, which specialises in telecom software. In its study titled "The IT Software and Services Industry in India-Strategic Vision 2000", Nasscom says that to become high-powered organisations, Indian software companies will have to make strategic acquisitions focused on Web-packaged services and building delivery scales.

E-commerce and mobile commerce also offer fresh opportunities to the Indian software sector. Indian software companies are altering their business models to focus on e-business solutions. Certain software companies have spun off their entire divisions into new entities. For instance, Technology Solutions has spun off Eloyalty while Metaphor has done the same with its Xpedior. Says Dewang Mehta, president of Nasscom: "Singapore has a well-established telecom infrastructure but requires content development and this is where we can work together.

That is why Nasscom has suggested that Indian software companies can partner with content-providers to cater to new platforms such as wireline technologies, broadbanding, DSL, Internet over cable and other emerging areas such as voice over IP. The idea here is to bundle applications with compatible content. Companies whose applications can be bundled as a part of larger service offerings could enter into strategic alliances as OEM suppliers.

Strategic stakes
There is more to this strategy. In a bid to reduce delivery cycles, time-to-market in new segments and to develop relations with clients, software companies are setting up local development centres close to customers. Many Indian information technology companies have opened US centres.

Another prong in this strategy is to acquire strategic stakes in foreign rivals. Some software companies are shifting their top management to developed markets. This gives them currency to garner newer and prestigious projects. For instance, Wipro's CEO Vivek Paul is based in the USA. "As cost becomes less of a competitive advantage, customer experience will become critical. Companies will have to increasingly recruit a local sales force in their initiative for consistent global marketing and presenting a local face", says N K Patni, director of Patni Computer Systems.

Reasoned euphoria
The euphoria about mergers, acquisitions and strategic alliances in the Indian software sector is not without reason. "Alliance is a necessity. Going forward, consolidation will happen. There are many small companies around and it makes a lot of sense", says Tekchandani of Sun F&C Asset Management. Software service is not a simple manpower contracting business. Established players with critical mass have several advantages. These are: ability to attract and retain people, pricing power with clients, follow up (maintenance or modification) business, reusable codes yielding savings in time and cost, project management experience, marketing infrastructure in terms of offices and liaisons abroad and the ability to accurately estimate time and cost.

To foray into software products, size is critical. Attaining a critical size is an important factor for success in the global market for software products. From the user's point of view, more than technical superiority, convenience in terms of availability of application packages and maintenance support is important. After all, size was the underlying factor for success of Microsoft in PC-based operating systems such as DOS and Windows.

Large companies need to acquire small companies to source skilled manpower, technology and gain market reach. Small and medium enterprises too need to acquire for attaining critical mass.

M&As are necessary for survival in the Indian software industry, unless the players are planning to create their own niche areas and develop a strong portfolio of technologies and projects. Acquisitions can help Indian software companies get ready-made offshore development skills.