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Many channel companies are looking at ways to grow inorganically and are exploring various options like IPO, merger and acquisition, and strategic investment
The IT channels seem to have reached an inflection point–the same as the software services companies did in 1993. If one compares the scenario then and now, it almost seems a repeat of history.
The year 1993 is considered a landmark for the software sector primarily because Infosys made its public offering. At the time of the IPO, Infosys had an annual turnover of $30 million.
Many regard the Infosys IPO and its blazing performance thereafter as the key to the development of the software industry. It encouraged other software companies to think big and grow inorganically. Infosys provided strong visibility to the software sector among the investor community and eventually helped build a momentum for the sector making it the blue-eyed boy of the stock markets.
The scenario in the IT channels is quite similar. There are many channel companies who have a turnover in excess of $30 million, and have been growing at over 50 percent year-on-year for the last couple of years. Many are looking at ways to grow inorganically and are seriously considering options like IPO, M&A and strategic investments.
The last two years have also seen a few leading channel companies come out with Initial Public Offerings (IPOs) to fund their inorganic expansion plans. While Tulip IT raised Rs 108 crore, Redington raised Rs 150 crore. Accel Frontline, and Paradyne Infotech raised Rs 42 crore and Rs 14 crore, respectively. In all, a whopping Rs 314 crore was raised by these four companies.
Post-listing their stock prices continue to do well. The Tulip stock, which was offered at an IPO price of Rs 120 per share, is currently trading at Rs 595. The stock made a 52-week high of Rs 685.
Redington stock too has managed to do well. Listed only last month, the stock is currently trading at Rs 150 compared to its IPO price of Rs 113. The issue was oversubscribed almost 43 times.
This is good news for channel companies exploring inorganic growth options. Analysts believe that successful listings by these companies are bound to provide strong visibility to the segment. Investors who have been too obsessed with IT software export companies are now looking favourably at smaller IT players with sound business model and future prospects.
It is likely to encourage many more solution providers and system integrators to explore the primary markets for funds. Already two system integrators, Allied Digital and Omnitech Infosolutions have filed their Red Herring Prospectus and are likely to launch their IPO in the next couple of months.
Says Prakash Shah, CFO, Allied Digital, "For two years, we have been toying with various inorganic growth ideas. We explored the option of bringing in a strategic investor and in fact had serious negotiations with an entity, but the talks failed in the final stage due to certain critical differences. Finally we decided on the IPO."
According to Shah the proceeds of the IPO will be invested in expanding infrastructure, setting up new business units and strategic acquisitions, both in India and overseas. "We plan to enter the technical BPO space with a 250-seat center, set up a network operations center and a security operations network to offer managed services. Plans are on for venturing into software development, primarily through acquisition," informs Shah.
Omnitech Infosolutions too has aggressive plans for which it plans to raise funds from the public. "The reason for IPO is of course to raise funds for inorganic expansion. We expect to raise Rs 40 crore through the exercise and these would be invested in setting up data recovery centers in Bangalore and Hyderabad, a network operations center and acquiring solutions and services companies overseas," informs Atul Hemani, CEO, Omnitech Infosolutions.
With such favourable market conditions, more system integrators are likely to hit the market soon. Those waiting in the wings are Ashtech Infotech, Team Computers, Embee Software, and Orient Technologies who have long been planning to raise funds.
Successful listing of Redington is expected to encourage a few distributors to contemplate IPOs.
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IPO
|
|
Year
|
Company |
IPO size (Rs crore)
|
Issue price
(Rs) |
Oversubscribed
(no. fo times)
|
CMP
(Rs) |
EPS
(Rs) |
P/E |
| Dec-05 |
Paradyne Infotech |
14
|
42
|
45
|
85
|
11
|
7.6
|
| Jan-06 |
Tulip IT |
108
|
120
|
27
|
590
|
28
|
20
|
| Nov-06 |
Accel Frontline |
42
|
75
|
2
|
80
|
5
|
14
|
| Jan-07 |
Redington India |
150
|
113
|
43
|
155
|
10
|
15
|
| CMP–Current Market Price as of March 1, 2007; EPS–Earnings Per Share on an annualised basis for FY07; P/E–Price to Earnings Ratio |
The domino effect
Analysts believe that listing of large companies will prove beneficial for smaller solution providers as well. "Many private equity and venture capital funds would look at investing in smaller companies that have the potential to go public within the next 3-4 years," says a stock analyst.
This could lead to a spate of M&As, and increase in private and strategic investment activities in channel companies. Already there seems to be a strong undercurrent building up for M&A activities in the channels.
Says Saurin Shah, CEO, Ashtech Infotech, "Many companies are realising that organic growth can only take you so far. And to grow beyond that, they need to look at M&A for inorganic growth. I expect a lot of action on this front." Shah admits that his company too is looking at M&A as one of the options to grow inorganically. "We are open to M&A and have in the process sent proposals to a few companies already," he says.
Anuj Gupta, Founder CEO, Trident Infotech believes that M&As will soon become a norm in channels. "The channel is on the verge of consolidation. The faster channel partners realise this, the better for their business and the industry as a whole," he says.
In September 2006, Gupta merged Trident with the Mumbai-based security consultancy firm MIEL e-Security for an undisclosed amount. "I was very clear where I wanted to take Trident. I had the option of moving into the consultancy space by building skill sets, or enter a strategic partnership that would catapult us into the big league. Looking at the opportunities in the security space, I chose the latter," he avers.
As the new head of sales and marketing in MIEL, Gupta says he is looking at a few more M&As going forward. "The market is growing exponentially and we have set a steep target to grow multifold, both organically and inorganically," he says.
Few of the other companies actively considering M&A include Mumbai-based Ontrack Solutions, Delhi-based Silicon Integrix and Bangalore-based Kinfotech.
Says Naresh Desai, Director, Ontrack Solutions, "It figures high on our agenda. We have received several queries and a few serious proposals for equitable mergers. We have considered these proposals seriously, but none of them appealed to us. Finding the right partner is imperative," he says.
The primary reason for Ontrack to consider M&A is to acquire geographical presence. "Our reach presently is limited to the western region. Having a nationwide presence tops our growth agenda. Setting up branches in newer geographies is not only time consuming, but also cost intensive and the gestation is longer. Instead M&A with the right partner can cut market-entry time," says Desai of Ontrack.
Silicon Integrix has been hunting for a right M&A candidate in South. "We are in preliminary talks with a couple of companies having profiles similar to us and having a strong presence in South. If everything goes fine, we expect to announce an M&A within the next six months," says RK Malhotra, Chairman, Silicon Integrix.
If it happens, it will be a second for Malhotra. In 2005, he merged his company, Silicon Comnet with Integrix India. "The benefits from our merger with Integrix has reaffirmed my belief that M&As are the best way to grow inorganically," adds Malhotra.
Bangalore-based Kinfotech is looking for a strategic investor to raise up to Rs 15 crore. "We are in the process of finalising our business plan and will eventually appoint a consultant to help us with the process. We are also open to strategic merger and acquisition. This is to enable us to grow geographically. We plan to have a national footprint. We plan to add consultancy, training, managed services and this requires substantial investments in building assets," says Prabhakar Kini, CEO, Kinfotech.
Vendor take
Vendors too believe it's the right time for merger and acquisitions in channels. Says Ashok Pamidi, Director, TSG, HP India, "It's just the right time for solution providers to look at mergers and acquisitions. For next level of growth, it's imperative that channels expand to newer geographies, add new technology skill-sets, target new customer segments. M&As can help achieve these effectively."
Agrees Ajay Verma, Director Channels & Alliances, Symantec India, "The scale of opportunities is so huge that channel companies have to look at inorganic growth strategies to tap them. Acute lack of skill-sets may also become an enabler for M&As as many companies think its better to acquire skill-sets than hire, train and retain."
Adds Mukul Mathur, Country Head, Business Partner Organisation, IBM India, "If one evaluates M&As around the world across different verticals there are essentially three drivers. One is entry into a new geography; second is to acquire skill sets and service capabilities to address new customer segments; and third is to attain financial stature to achieve economies of scale, consolidate costs, etc."
Sonik Porwal, Director, Channels & Alliances, EMC India highlights another trend in the industry that he believes is a sign that the channels are ready for M&As. "Over the last couple of years we have seen increased collaboration between our partners either to provide a comprehensive solution or support SMB customers who have gone multi-locational. These partners have shown great maturity in collaborating. There is no insecurity in sharing projects and clients. Probably such co-operation and collaboration are a precursor to M&As," he says.
The foreign angle
Market observers are not ruling out the foreign hand in M&As going forward. "A couple of US-based system integrators having Indian roots have approached me inquiring about good system integrators they can acquire. They are impressed with the growth opportunities and want to enter the market via acquisition," says HP's Pamidi.
In distribution, the foreign angle seems a strong possibility. Ingram Micro India CEO, K Jaishankar suggests strong possibilities for M&As in distribution. "I do expect M&A activities to continue. India is one of the fastest growing markets. After Tech Pacific acquisition, people are seeing opportunities for an additional distributor," says Jaishankar.
Rashi Peripherals have received several calls from investors for either buy-out or strategic investments. Says Managing Director, Suresh Pansari, "We have received many calls from investment bankers probably acting on behalf of their clients. Most have been MNC IT distributors, but a couple has also come from MNC consumer durable distributors."
Distributors like Neoteric and Savex have also said that they are open to strategic investments.
Going ahead
As many channel companies prepare to take the next leap in their evolution cycle, there is no doubt they will look at multiple options for inorganic growth. Whether or not they are able to emulate the software sector will entirely depend no how well they execute their strategies and sustain their growth momentum.
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