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Technology Acquisition in India

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This slide-deck was prepared as part of the academic project for Strategic Leadership course by Prof J Ramachandran at IIM B.

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Technology Acquisition in India

  1. 1. Technology Acquisition An analysis from Indian perspective PGSEM, IIM Bangalore Aseem Mudbidri (2008015) Bodhisatya Sarker (2008017) Naveen Kumar (2008040) Satyajit Paul (2008046)
  2. 2. 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
  3. 3. 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?
  4. 4. Global Technology M&A Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Number 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%
  5. 5. Indian Tech M&A Total Tech Acquisitions In India (Year 2004 – 2009 ) Acquisitions of Indian Tech Cos •Total outbound M&A [By Indian Co] - $13.276 b •Total No of Tech Acquisitions [By Indian Co] – 287 Total Deal Amount (Million $) # Deals •Total M&A - $20 b •Total Tech Acquisitions – 333 $3,069.00 $2,146.00 $2,370.00 Infosys -3 Wipro -9 $1,542.00 $1,562.00 $1,167.00 TCS -6 HCL -7 $347.00 24 12 26 29 26 17 13 2004 2005 2006 2007 2008 2009 2010-Q2 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 •Total Tech M&A(04) [of Indian Co] – $ 12.6 b Dec-10 Aricent by PE Firms $1,050.00 •Total No of Tech Acquisitions [of Indian Co] -147 Feb-07 Keane(I) by Caritor $854.00 Dec-08 Axon by HCL (I) $682.00 • 3 acquisitions till date by Big 6 companies Apr-09 Satyam C S (I) by Tech Mahindra $605.00 •More than 95% are IT services/ITES companies 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 Note: Above data is based on the published data for the period of 2004 till 2010 Source: VentureIntelligence - http://www.ventureintelligence.in/deals/meracqview.php
  6. 6. Global Movers and Shakers “It's crazy to say you will only Acquisitions 2010 grow through [in-house] Acquisitions % of US Rest of the Acquisitions Indian innovation. It's bizarre that Company since 2000 Companies world Number Acquisitions Google 76 76.32% 18 17 None there's a stigma to buying HP 56 75.00% 14 2 None something rather than Cisco 91 90.11% 9 3 None Daksh, building it yourself.“ IBM 93 72.04% 26 8 Network Sol - Larry Ellison to New York Times in Microsoft 95 71.58% 27 0 None 2008 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.
  7. 7. Various Drivers Behind Tech Acquisitions VC Funding Tech Startups Successful VCs Companies Corporate/ VC Acquisition PE Harvesting
  8. 8. Common Strategic Objectives for Acquisitions Technology Company Large Company Access to complementary products Acquire key technology and markets Access to working capital Eliminate a competitor Best liquidity event for founders and Expand or add a product line investors Best and fastest return on investment Gain creative talent Faster access to established Gain expertise and entry in a new infrastructure market Improve distribution capacity Gain a time-to-market advantage More rapid expansion of customer Increase earnings per share base
  9. 9. M&As are like Waves Recent Trends To acquire a latest technology, companies • Mobility continues as growing deal driver either do - • Technology-enabled solutions in health care information technology (HIT) • In-house development • Smart grid technology • Acquire some Tech company having the Traditionally Popular domains technology expertise. • Networking • Security • Gaming • Social Networking • Identity Management etc. VERTICALS HP Microsoft IBM Oracle Nokia SAP Mobile Palm Mobicomp, AppForge Symbian Sybase applications Danger Cloud iBrix, 3Com (Azure) Amazon EMC, Sun Coghead Computing WebServices, Microsystems Cast Iron Systems, Coremetrics Services EDS - PwHC CSC (predicted) business Business Cognos Hyperion Business Intelligence Solutions Objects, Sybase
  10. 10. Taxonomy of IT Companies Business/IT Consulting Accenture Infosys, Software Project/ IBM Global Services, IT Services IT Implementation Wipro, CTS, Genpact, IBM-Daksh BPO/ITES D A Enterprise S/W Microsoft, Oracle, SAP, IBM, HP & Applications amazon.com Traditional Shrink-Wrap Microsoft, McAfee eBay.com, IndiaMart.com Products Physical Goods Media, Entertain Microsoft, Sony Goods ment, (eCommerce) Capitaline.com Games Information Goods makemytrip.com, Irctc.com IT Product naukri.com Companies E B bharatmatrimony.co Web-based Salesforce.com redbus.in Enterprise Apps Successfactors.com Makemytrip.com Products/ SAS Ec2 (Amazon) S-A-S Yahoo.com Service/Utilities Rediff.com Ndtv.com Consumer Centric Web-Portals Social/Professional Bigadda.com Networking Facebook.com Apnacircle.com C Linkedin.com
  11. 11. Product-Customer Positioning Baazee.com(eBay), Zoho, i-flex, High bharatmatrimony.com, Skelta, Fusionchart, bigadda.com Tally, IndiaMart, naukri.com Revenue  Indian Product Companies Lifeblob.com, 8kMile, voicetap.in, Srishti Software Low cocubes.com, Consumer Enterprise Type of Customer 
  12. 12. Leaders behind the Start ups Company Founder Profile Category BE -1993 - 1997 INSEAD MBA iXiGO.com - India's #1 travel search engine Dharmendra Yashovardhan HCL Perrot Travel & Hotel IIT Kanpur: 1997 - 2001 Aloke Bajpai INSEAD Travel & Hotel IIM A: 1990 - 1992 MakeMyTrip.com Deep Kalra Leadership in the Category Travel & Hotel Founded 1997 bharatmatrimony.com Leadership in Category Matrimony, Property, (IndiaProperty.com,ClickJobs.com) Murugavel Janakiraman MCA, Masters in C Sc Health, Jobs naukri.com Founder 1995 (jeevansathi.com,99acres.com, naukrigulf.com, IIM A 1989 Jobs, Matrimony, Property, Jobs, brijj.com,quadranglesearch.com) Sanjeev Bikhchandani Leadership in category Professional Networking Founder 2007 BE - 1996 - 2000 lifeblob.com Pranav Bhasin Follower Social Network Founder 2007 BE - 2001 - 2005 lifeblob.com Rakesh Rajan Follower Social Network Founder 2009 BE: 1993 - 1997 voicetap.in Mrigank Tripathi INSEAD - 2005 Social Network IIT B 1985, MS. Skelta software Sanjay Shah Serial Entrepreneur Enterprise Software BITS Pilani, MS 12+ years in IT while founding i-flex Rajesh Hukku Recognized the Opportunity Enterprise Software Tally Shri S. S. Goenka Industrialist, Early entrant (1986) Enterprise Software
  13. 13. Product Cos- Insight into the product and people • Lack of IP generation • Many of them are in Information goods and Web based Social/Professional portals Networking. e.g. there are 40+ websites dedicated for Travel and tickets. • Most of the entrepreneurs have IT background or with Management education with approximately 5 – 10 yrs of Industry experience. • Many of them are driven by passion and less of industry insights. Enterprise Product Cos
  14. 14. Increased activity in the Indian software product industry is being witnessed only after three decades of its evolution History of Indian Software Product Business High Early Stage Growth Stage Acceleration Stage Softek Compilers Flexcube (i-flex) mChek Instaplan TableCurve (Cranes) Arc (Manthan) Muneemji Nikira (Subex) VIS (3d SOC) Easy Acc Tally IViZ Number of Product Businesses iViZ Manthan mChek Vegayan Subex 3D Solid Infosys Compression Innoviti Nucleus Tally Elitecore Software Solutions InfrasoftTech Compulink Technologies More than 300 HCL Cranes startups in the Kale last 4 years TCS Ramco Polaris Consultants i-flex Systems Wipro Systems Newgen Visionary companies built compilers and application India excels in banking- Softek software for local market specific products requirement Low 1980 – 1990 1990 – 2000 2000 – 2007 Source: Zinnov Analysis
  15. 15. 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.
  16. 16. Determinants of Advantage - Israel Demand Conditions Factor Conditions 1) Government Subsidy 1) High Skilled Labor for R&D projects 2) Low cost 2) Programs to encourage technological incubators. Related & Supporting Industries Firm Strategy & Rivalry 1) Government encouraged 1) Local competition among bilateral and multilateral various IT firms in Israel to bring international R&D collaboration about IP protected software Reference: R&D Policy in Israel-An Overview and Reassessment – Manuel Trajtenberg (Competitive Advantage of Nations by Michael E. Porter)
  17. 17. Embracing latest Technology (Computers) US growth – 5% to 15% Israel growth – 5% to 25%
  18. 18. Factor Analysis
  19. 19. Patents Filed & ICT Competitiveness China Patents filed - 2008 2008 (Estimate) 6,089 1,882 766 China Israel India India R&D Expenditures of Indian IT majors are in the range of 0.3% to 1.3% of Revenue vs Global range of 5% to 15%
  20. 20. Challenges for IT Products from India Lack of VC Investments in Software Product Lack of Business Lack of Experienced Distribution Management Network and Talent Global Access Challenges for Indian Higher Entry Smaller Base of Barrier due to Domestic Market Software MNC presence Industry
  21. 21. Liabilities of Origin - India Customer • Good Service Quality. Poor Product Quality. Perception • Low Brand Value Quality of • Risk averse culture. Lack of technological incubators. Ecosystem • Poor Access to Financial Capital. Lack of VC funding. Market • Lack of Management Talent with Global Experience Familiarity & • Lack of Networking within the Industries. Access
  22. 22. 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.
  23. 23. Indian Providers and MNCs Capabilities Are Converging MNCs Indian Providers Strengths: Strengths:  IBM, Accenture and Hewlett-Packard have  India's top three IT firms each has a market value large captives in India enabling them to move of between $18 billion-$27 billion and boasts a Convergence global footprint. more of their overseas work to these lower- cost centers  Cognizant Technology has bought the Indian  Oracle and Dell have snapped up targets to backoffice unit of UBS for about $75 million grow beyond their core areas, while Xerox is  HCL Technologies paid about 440 million pounds buying Affiliated Computer Services for $5.5 ($720 million) for Axon, marking the biggest billion to jump into the outsourcing sector. overseas acquisition by an Indian IT firm.  These companies have also made acquisitions  TCS acquired Citi Global Services that enable them to compete better , 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.
  24. 24. 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
  25. 25. Stock Price Movements after M&A - TCS acquiring Citi Global Services
  26. 26. Stock Price Movements after M&A - IBM Acquisitions IBM acquisition of Sterling Commerce in 2010 IBM acquisition of Price water House Coopers in 2002
  27. 27. 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 a much lesser cost compared to acquiring another company along with all its integration challenges. However, considering global firms like IBM, Accenture are moving down the value chain by leveraging the cost arbitrage in India, we see small but focused Acquisitions of would be the way to leap into the big league and gain more competitive advantage.
  28. 28. Conclusion - Product Companies M&A • Currently, the Indian Product Companies are far from being successful as compared to Silicon Valley companies. – 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.
  29. 29. Recommendations • Invest for Future Growth, Indian IT Services majors need to take the opportunity of emerging trends in technology in the form of Cloud based applications and computing. Cloud computing is necessarily a disruptive in nature and Indian IT firms need to take the advantage of this. • Increase R&D expenditure, R&D expenditure as share of revenue needs to increase. • 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 take the products to global market. We see good opportunity for such reverse- innovation. • Leverage on the Engineering Prowess, Both Tech startups as well as IT majors need to leverage on the product building capabilities of the engineers from the MNC captive units. • Leadership Matters, Finally, it is the leadership who needs to set the strategic direction and follow the dream of “Think Big, Think Long Term”. Things take longer and more painful to happen with product development companies. To have a sustainable energy & passion to run the product business, you need to think big and have the patience and perseverance to follow the long-term vision.
  30. 30. Concluding Thought The statistics indicate that a start up Technology Company is more likely to be acquired than it is to go public. Given that reality, a start up Technology Company should invest the time to identify the Large Companies that are the best candidates to meet start up company’s strategic needs. It also should identify the strategic objectives of those Large Tech Companies and keep that data in mind during its business planning process. - Fenwick & West
  31. 31. References Reference - 1 Google Flops & Failures – The Failed Google Graveyard http://www.wordstream.com/articles/google-failures-google-flops Reference – 2 Trends in IT Patents Filed from India: An Analysis http://nopr.niscair.res.in/bitstream/123456789/3393/1/JIPR%2014(2)%20149-152.pdf Reference – 3 The Global Information Technology Report 2008-2009 © 2009 World Economic Forum http://www.tubisad.org.tr/Tr/Library/Analizler/Toward%20Globalization%20and%20Collaboration.pdf Reference – 4 Mergers & Acquisitions for High Technology Companies by FENWICK & WEST LLP http://www.fenwick.com/docstore/Publications/Corporate/MA.pdf Reference - 5 The Choking of Innovation in Indian IT Industry http://www.nasscom.in/download/ChokingofInnovation.PDF Reference – 6 World Intellectual Property Information http://www.wipo.int/pressroom/en/articles/2009/article_0002.html Reference – 7 Indian Software Industry – the way forward http://www.fms.edu/downloads/conclub_ITinIndia-TheWayForward.pdf Reference – 8 R&D Policy in Israel – An Overview and Assessment http://www.tau.ac.il/~manuel/pdfs/R&D%20Policy%20Israel.pdf Reference – 9 Intellectual Property in the Indian Software Industry http://s251835929.onlinehome.us/reports/India_Software.pdf
  32. 32. Thank You! In case, you need the complete report, please send an email to - satyajit.paul08@iimb.ernet.in