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Consolidation the new mantra of small IT companies

Imran Qureshi

The depressing economic situation appears to be forcing small and medium companies in India's information technology sector to look at mergers and acquisitions.

In an apparent bid to meet the newfound reluctance of prospective customers to deal with small companies in the downturn situation, small and medium enterprises are assessing the plus and minus points of their rivals to enlarge their basket of service offerings.

At least two Bangalore-based companies, Kshema Technologies and iVega Corporation, are discussing mergers to grow.

"Talks have been on for some time, but the valuation is yet to be decided," a senior official of Kshema Technologies, who did not want to be identified, told IANS.

The marriage, interestingly, is being brokered by the venture capitalist Global Technology Ventures, which invested in both the companies along with several others during the boom of yesteryear. GTV was formerly Sivan Securities.

The move comes in the wake of some significant changes in the way business is being done after the slowdown hit the software services sector and Black Tuesday has given more black eyes to several small and medium companies than ever before.

"Customers are looking at larger companies because, in the downturn situation, the job of the negotiator is on the block if he or she deals with a small company that closes down for a totally different reason," says one fund manager.

There are also other reasons. The results of the last two quarters of several companies have shown that larger companies continue to get fresh contracts while the balance sheets of the SMEs turn red.

"We have had a good quarter and the second half of the year looks better. But the other reason is also that we are not strong in financial services like iVega is.

Our strength is in telecom, healthcare and industrial automation. So, the merger will only add to our list of portfolios," the Kshema official says.

"The other factor is also that valuations are low at present. So, mergers and acquisitions are more attractive. There are a few companies that are looking at this option in the current depressing scenario," adds a fund manager of a multinational venture capital firm.

As Infosys Technologies MD and COO Nandan Nilekani told the CEOs' conclave at BangaloreIT.com 2001 earlier this month, "SMEs have four or five choices. Consolidate among themselves, get acquired by bigger players, partner with someone who has customer capability or focus on the Indian market where the cost of entry is lower."

India's largest software exporter, Tata Consultancy Services, for instance, works with Jaatayu software to cater to the needs of its customers in the wireless communication arena, an expertise that the small company has. This is what R Ramanan, executive director, CMC, a TCS company, had told the conclave.

Kshema Technologies recorded revenues of Rs 600 million last year while iVega Corporation's turnover was around Rs 500 million.

Indo-Asian News Service

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