Technology AcquisitionAn analysis from Indian perspective

PGSEM, IIM Bangalore

Aseem Mudbidri (2008015)Bodhisatya Sarker (2008017)Naveen Kumar (2008040)Satyajit Paul (2008046)

Overview

• Problem Statement• Global & Indian Tech Acquisitions• Strategic Objectives for Acquisitions• Nature of new start-ups (IT Companies Taxonomy)• Product & People• Comparison with Israel• Evolution of Tech start ups in India• Country Positioning • What goes for Product Development• Challenges faced by IT Product Companies• Challenges faced by IT Services Companies• How M&A is viewed by Mgmt and by Investors• Conclusion• Recommendations• Concluding Thought

Strategic Leadership & next phase of Indian IT Industry

• Why Big Indian Firm(s) are not doing enough Acquisitions?

• Why some of the Indian Tech start ups are not getting acquired?

Global Technology M&A

Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10Number of Deals 184 363 347 315 361

QoQ Change 12.2% 97.3% -4.4% -9.2% 14.6%Total Value (MUSD) $23,265 $24,553 $21,062 $12,765 $37,236

QoQ Change 244.2% 5.5% -14.2% -39.4% 191.7%

Median Value $40.2 $20.0 $25.5 $30.0 $71.2

QoQ Change 1.6% -50.2% 27.5% 17.6% 137.3%

Indian Tech M&A

$347.00

$1,167.00

$1,562.00

$2,370.00

$3,069.00

$2,146.00

$1,542.00

13172629261224

2010-Q2200920082007200620052004

Acquisitions of Indian Tech Cos

Total Deal Amount (Million $) # Deals

•Total Tech M&A(04) [of Indian Co] – $ 12.6 b•Total No of Tech Acquisitions [of Indian Co] -147• 3 acquisitions till date by Big 6 companies•More than 95% are IT services/ITES companies

Year Acquisition Details Amount (million $)

Jan-05 Oracle acquires i-flex(I) $2,000.00

May-07 CSC acquires Covansys(i) $1,300.00

Nov-06 Capgemini acquires Kanbay(I) $1,250.00

Dec-10 Aricent by PE Firms $1,050.00

Feb-07 Keane(I) by Caritor $854.00

Dec-08 Axon by HCL (I) $682.00

Apr-09 Satyam C S (I) by Tech Mahindra $605.00

Aug-07 Infocrossing by Wipro(I) $600.00

Oct-08 TCS(I) acquires Citigroup G S $505.00

Nov-04 GENPACT by PEF firms $500.00

Total Tech Acquisitions In India (Year 2004 – 2009 )•Total outbound M&A [By Indian Co] - $13.276 b•Total No of Tech Acquisitions [By Indian Co] – 287•Total M&A - $20 b•Total Tech Acquisitions – 333

Note: Above data is based on the published data for the period of 2004 till 2010Source: VentureIntelligence - http://www.ventureintelligence.in/deals/meracqview.php

Infosys - 3Wipro - 9TCS - 6HCL - 7

Global Movers and Shakers

CompanyAcquisitions since 2000

% of US Companies

Acquisitions Rest of the world

2010 Acquisitions Number

Indian Acquisitions

Google 76 76.32% 18 17 None

HP 56 75.00% 14 2 None

Cisco 91 90.11% 9 3 None

IBM 93 72.04% 26 8Daksh,

Network Sol

Microsoft 95 71.58% 27 0 None

Oracle 51 5 i-flex

“Top 10 technology companies are sitting on a cash reserve of US$258 billion. With cash reserves of this magnitude….. they are well-positioned to execute on attractive deals when the timing is right”-Joe Steger, Global Technology Transaction Advisory Services Leader at Ernst & Young

“Google to step up buys as internal projects falter” – Economic Times on 12-Aug-2010

“They are trying to keep up with a rapid rate of innovation in the online world” - Clay

Moran, as Analyst at Benchmark at Boca Raton Florida.

“It's crazy to say you will onlygrow through [in-house]innovation. It's bizarre thatthere's a stigma to buyingsomething rather thanbuilding it yourself.“- Larry Ellison to New York Times in

2008

Various Drivers Behind Tech Acquisitions

Tech Startups

Successful

Companies

Corporate/

PE

VCs

VC Funding

AcquisitionVC Harvesting

Common Strategic Objectives for Acquisitions

Access to complementary products and markets

Access to working capital

Best liquidity event for founders and investors

Best and fastest return on investment

Faster access to established infrastructure

Improve distribution capacity

More rapid expansion of customer base

Acquire key technology

Eliminate a competitor

Expand or add a product line

Gain creative talent

Gain expertise and entry in a new market

Gain a time-to-market advantage

Increase earnings per share

Technology Company Large Company

M&As are like WavesTo acquire a latest technology, companies

either do -

• In-house development

• Acquire some Tech company having thetechnology expertise.

VERTICALS HP Microsoft IBM Oracle Nokia SAP

Mobile

applications

Palm Mobicomp,

Danger

AppForge Symbian Sybase

Cloud

Computing

iBrix, 3Com (Azure) Amazon

WebServices,

Cast Iron Systems,

Coremetrics

EMC, Sun

MicrosystemsCoghead

Services

business

EDS - PwHC CSC (predicted)

Business

Intelligence

Cognos Hyperion

SolutionsBusinessObjects, Sybase

Recent Trends • Mobility continues as growing deal driver• Technology-enabled solutions in health care information

technology (HIT)• Smart grid technology

Traditionally Popular domains• Networking• Security• Gaming• Social Networking• Identity Management etc.

Taxonomy of IT Companies

IT Services

Business/IT Consulting

Software Project/IT Implementation

BPO/ITES

IT ProductCompanies

TraditionalProducts

Web-based Products/

S-A-S

Media, Entertainment,Games

Shrink-Wrap

Enterprise S/W& Applications

Enterprise AppsSAS

Consumer Centric Web-Portals

Goods(eCommerce)

Physical Goods

Information Goods

amazon.comeBay.com, IndiaMart.com

Capitaline.commakemytrip.com,Irctc.comnaukri.combharatmatrimony.comredbus.inMakemytrip.com

Bigadda.comFacebook.comApnacircle.comLinkedin.com

Salesforce.comSuccessfactors.comEc2 (Amazon)

Microsoft, McAfee

Microsoft, Oracle, SAP, IBM, HP

Microsoft, Sony

AccentureInfosys, IBM Global Services,Wipro,CTS,Genpact, IBM-Daksh

Service/Utilities

Social/Professional Networking

Yahoo.comRediff.comNdtv.com

B

C

AD

E

© Satyajit Paul

Product-Customer Positioning

Baazee.com(eBay),

bharatmatrimony.com,

bigadda.com

Zoho, i-flex,

Skelta, Fusionchart,

Tally, IndiaMart, naukri.com

Lifeblob.com,

voicetap.in,

cocubes.com,

8kMile,

Srishti Software

Indian Product Companies

Consumer Enterprise

Rev

en

ue

Low

H

igh

Type of Customer

Leaders behind the Start upsCompany Founder Profile Category

iXiGO.com - India's #1 travel search engine Dharmendra Yashovardhan

BE -1993 - 1997INSEAD MBAHCL Perrot Travel & Hotel

Aloke BajpaiIIT Kanpur: 1997 - 2001INSEAD Travel & Hotel

MakeMyTrip.com Deep KalraIIM A: 1990 - 1992Leadership in the Category Travel & Hotel

bharatmatrimony.com(IndiaProperty.com,ClickJobs.com) Murugavel Janakiraman

Founded 1997Leadership in CategoryMCA, Masters in C Sc

Matrimony, Property, Health, Jobs

naukri.com(jeevansathi.com,99acres.com, naukrigulf.com, brijj.com,quadranglesearch.com) Sanjeev Bikhchandani

Founder 1995IIM A 1989Leadership in category

Jobs, Matrimony, Property, Jobs, Professional Networking

lifeblob.com Pranav Bhasin

Founder 2007BE - 1996 - 2000Follower Social Network

lifeblob.com Rakesh Rajan

Founder 2007BE - 2001 - 2005Follower Social Network

voicetap.in Mrigank Tripathi

Founder 2009BE: 1993 - 1997INSEAD - 2005 Social Network

Skelta software Sanjay ShahIIT B 1985, MS.Serial Entrepreneur Enterprise Software

i-flex Rajesh Hukku

BITS Pilani, MS12+ years in IT while foundingRecognized the Opportunity Enterprise Software

Tally Shri S. S. Goenka Industrialist, Early entrant (1986) Enterprise Software

Product Cos- Insight into the product and people

• Lack of IP generation• Many of them are in

Information goods andSocial/ProfessionalNetworking. e.g. there are40+ websites dedicated forTravel and tickets.

• Most of the entrepreneurshave IT background or withManagement education withapproximately 5 – 10 yrs ofIndustry experience.

• Many of them are driven bypassion and less of industryinsights.

Enterprise Product Cos

Web based portals

Increased activity in the Indian software product industry is being witnessed only after three decades of its evolution

Source: Zinnov Analysis

Early Stage Growth Stage Acceleration Stage

1980 – 1990 1990 – 2000 2000 – 2007

Nu

mb

er

of

Pro

du

ct B

usi

ne

sse

s

Low

HighHistory of Indian Software Product Business

Wipro Systems

Softek

TCS

HCLMore than 300 startups in the last 4 years

India excels in banking-specific products

Softek Compilers

Instaplan

Muneemji

Easy Acc

Flexcube (i-flex)

TableCurve (Cranes)

Nikira (Subex)

Tally

mChek

Arc (Manthan)

VIS (3d SOC)

IViZ

Visionary companies built compilers and application software for local market requirement

i-flex

Infosys

Cranes

TallySolutions

RamcoSystems

Polaris

Subex

Compulink

Nucleus Software

Newgen

InfrasoftTech

Kale Consultants

Elitecore Technologies

iViZ

3D Solid Compression

Manthan

Innoviti

VegayanmChek

Comparison between two emerging economics – India vs. Israel

Israel India

Microsoft 4 0

Google 1 0

IBM 4 2

Oracle 3 1

Cisco 3 0

Figures indicate the number of product companies acquired.

Determinants of Advantage - Israel

Factor Conditions

1) High Skilled Labor

2) Low cost

Demand Conditions

1) Government Subsidy

for R&D projects

2) Programs to encourage technological incubators.

Related & Supporting Industries

1) Government encouraged bilateral and multilateral

international R&D collaboration

Firm Strategy & Rivalry

1) Local competition among various IT firms in Israel to bring

about IP protected software

Reference: R&D Policy in Israel-An Overview and Reassessment – Manuel Trajtenberg(Competitive Advantage of Nations by Michael E. Porter)

Embracing latest Technology (Computers)US growth – 5% to 15%Israel growth – 5% to 25%

Factor Analysis

Patents Filed & ICT Competitiveness

6,089

1,882

766

China Israel India

Patents filed - 2008

2008 (Estimate)

R&D Expenditures of Indian ITmajors are in the range of0.3% to 1.3% of Revenue vsGlobal range of 5% to 15%

China

India

Challenges for Indian Software Industry

Smaller Base of Domestic Market

Lack of Experienced

Management Talent

Lack of VC Investments in

Software Product Business Lack of

Distribution Network and Global Access

Higher Entry Barrier due to MNC presence

Challenges for IT Products from India

Liabilities of Origin - India

• Good Service Quality. Poor Product Quality.

• Low Brand Value

Customer Perception

• Risk averse culture. Lack of technological incubators.

• Poor Access to Financial Capital. Lack of VC funding.

Quality of Ecosystem

• Lack of Management Talent with Global Experience

• Lack of Networking within the Industries.

Market Familiarity &

Access

Challenges in Indian IT Services Space

• Ever increasing pressure on the margin.• Growing clout of MNC services firm(s) choking the supply as well as

demand side.• Other evolving low cost locations.• Higher Employee turn out rate.• Low or no differentiation.• Higher expectations from investors.• Currency fluctuation/appreciation.• Reducing Govt. incentives.• Growth for top companies seems to be unsustainable.• Growth for Tier-II companies already hit plateau, now profitability

seems to be under threat.• So, what was BLUE-OCEAN seem to becoming RED-OCEAN.

Indian Providers

Strengths:

MNCs

Strengths:

IBM, Accenture and Hewlett-Packard have large captives in India enabling them to move more of their overseas work to these lower-cost centers

Oracle and Dell have snapped up targets to grow beyond their core areas, while Xerox is buying Affiliated Computer Services for $5.5 billion to jump into the outsourcing sector.

These companies have also made acquisitions that enable them to compete better

India's top three IT firms each has a market value of between $18 billion-$27 billion and boasts a global footprint.

Cognizant Technology has bought the Indian backoffice unit of UBS for about $75 million

HCL Technologies paid about 440 million pounds ($720 million) for Axon, marking the biggest overseas acquisition by an Indian IT firm.

TCS acquired Citi Global Services , Comicrom, Phoenix Global Solutions, AFS etc strengthening its BPO segment

Infosys acquired the BPO arm of Royal Philips

Cultural and integration risks associated with large M&A are also a barrier and Indian firms are unlikely to shed their cautious approach.

Convergence

Indian Providers and MNCs Capabilities Are Converging

Why Indian Firms Shy from Large Overseas M&A?

M & A leads to

• High costs of synergy between both companies.

• High Risk for Large Investments.

• Post acquisition integration issues.

• Cultural differences.

Agency problem where the Indian IT firms focus on quarterly profits instead of future potential profits to keep the investors (shareholders) happy. Investments will dent their earnings and affect stock prices.

Reference: Dubious Value of International Acquisitions by Emerging Economy Firms: The Case of Indian Firms – Aneel Karnani

Stock Price Movements after M&A- TCS acquiring Citi Global Services

Stock Price Movements after M&A- IBM Acquisitions

IBM acquisition of Price water House Coopers in 2002

IBM acquisition of Sterling Commerce in 2010

Conclusion – M&A for Big Indian IT firms

Right now, Indian IT services businesses are able to grow

since there is local talent pool available (Organic Growth) at amuch lesser cost compared to acquiring another companyalong with all its integration challenges.

However, considering global firms like IBM, Accenture aremoving down the value chain by leveraging the cost arbitragein India, we see small but focused Acquisitions of would be theway to leap into the big league and gain more competitiveadvantage.

Conclusion - Product Companies M&A

• Currently, the Indian Product Companies are far from being successful as compared to Silicon Valleycompanies.– The products have less IP generation.– Do not have solid customer base.– No immediate ROI in sight.Hence, top global IT majors will continue to overlook the Indian Product companies till our Product Industry

makes progress.

Suggestions:• An Entrepreneurial culture backed by industry insights needs to be cultivated.• The Ecosystem should be in place where there is continuous encouragement for people to

innovate.• Watch out for emerging technologies.• Look for missing pieces in the Big company’s product portfolio.• Take the advantage of growing domestic market , build competence/capabilities and leverage it to

rest of the world.• Last but not the least its innovation, innovation and innovation.• It’s a win-win game for Indian IT Product as well as IT Services firms if proper synergy can be

brought into.

Recommendations

• Invest for Future Growth, Indian IT Services majors need to take the opportunity ofemerging trends in technology in the form of Cloud based applications andcomputing. Cloud computing is necessarily a disruptive in nature and Indian ITfirms need to take the advantage of this.

• Increase R&D expenditure, R&D expenditure as share of revenue needs toincrease.

• Make use of Local Markets, Startups Mid-size, need to focus on the local needs(which are typically very high in scale), develop products and services and then takethe products to global market. We see good opportunity for such reverse-innovation.

• Leverage on the Engineering Prowess, Both Tech startups as well as IT majorsneed to leverage on the product building capabilities of the engineers from theMNC captive units.

• Leadership Matters, Finally, it is the leadership who needs to set the strategicdirection and follow the dream of “Think Big, Think Long Term”. Things take longerand more painful to happen with product development companies. To have asustainable energy & passion to run the product business, you need to think bigand have the patience and perseverance to follow the long-term vision.

Concluding Thought

The statistics indicate that a start up Technology Company ismore likely to be acquired than it is to go public. Given thatreality, a start up Technology Company should invest the timeto identify the Large Companies that are the best candidatesto meet start up company’s strategic needs. It also shouldidentify the strategic objectives of those Large TechCompanies and keep that data in mind during its businessplanning process.

- Fenwick & West

References

Reference - 1Google Flops & Failures – The Failed Google Graveyardhttp://www.wordstream.com/articles/google-failures-google-flopsReference – 2Trends in IT Patents Filed from India: An Analysishttp://nopr.niscair.res.in/bitstream/123456789/3393/1/JIPR%2014(2)%20149-152.pdfReference – 3The Global Information Technology Report 2008-2009 © 2009 World Economic Forum http://www.tubisad.org.tr/Tr/Library/Analizler/Toward%20Globalization%20and%20Collaboration.pdfReference – 4Mergers & Acquisitions for High Technology Companies by FENWICK & WEST LLPhttp://www.fenwick.com/docstore/Publications/Corporate/MA.pdfReference - 5The Choking of Innovation in Indian IT Industryhttp://www.nasscom.in/download/ChokingofInnovation.PDF

Reference – 6World Intellectual Property Informationhttp://www.wipo.int/pressroom/en/articles/2009/article_0002.htmlReference – 7Indian Software Industry – the way forwardhttp://www.fms.edu/downloads/conclub_ITinIndia-TheWayForward.pdfReference – 8R&D Policy in Israel – An Overview and Assessmenthttp://www.tau.ac.il/~manuel/pdfs/R&D%20Policy%20Israel.pdfReference – 9Intellectual Property in the Indian Software Industryhttp://s251835929.onlinehome.us/reports/India_Software.pdf

Thank You!

In case, you need the complete report, please send an email to -satyajit.paul08@iimb.ernet.in