Friday, January 14, 2011

Why Patni iGate merger might not work?

What are strategic rationale of Patni iGate merger?

There are two broad categories of strategic rationales for IT/BPO companies’ mergers and acquisitions . These categories are Economics of Credentials and Economics of Relationship

In Patni iGate merger the predominant rationale as discussed in media is Economics of Credential. This merger will develop credentials of combined entity as a billion dollar company and there is hope that this billion dollar credential will lead to automatic entry of combined entity into big league of IT outsourcing deals.

Not necessary…

I see flaw in this reasoning. In sourcing process for large outsourcing deals final RFP stage is narrowed down to 5 -6 vendors. Even if client has decided for India based outsourcing vendor, advisors recommend to have at least one Global Vendor like IBM, Accenture or Cap Gemini in the final list. Also advisors recommend to have at least one niche player in the final RFP stage. That leaves for around 4 large outsourcing companies to participate and fight in RFP stage.

Will one billion dollar revenue be enough to qualify in top 4 vendors in India? Not necessary…

iGate Patni combines stands at Number 8 in India after TCS, Infosys, Wipro, Cognizant, HCL, Mahindra, Mphasis ( In order of Revenue)

This 8th position in billion dollar club is not necessary a huge advantage in large deals if the entry criteria is top 4 or 5.

One billion dollar psychological mark became entry criteria when only 4 or 5 firms were over billion dollar. If 8 or 10 firms cross billion dollar mark then next cut off will be Five Billion Dollar Revenue ( TCS and Infosys have already crossed $5 Billion and Wipro and Cognizant might cross next year. HCL is already advertising it self $5.5 billion company in TV advertisements though its IT services revenues are in range of $ 3 billion)

Other rationale I came across is that old clients will stay and combined entity will pursue new clients for big deals.

Not necessary…

Why does a fortune 500 client some times prefer a small firm for some work when it can very well afford a large firm. I have been in shoes of business users and answer is service, flexibility and management attention. For a small company a big client becomes a marquee client and this marquee client is treated and serviced very well.

For the above reason, small companies always create niche for themselves and survive in any service industry. Now if two small companies merge and become a billion dollar firm then some of the old clients might re evaluate their decision to continue with the new billion dollar firm. The clients might move to other smaller firms like Mindtree, Hexaware, Zensar, L&T Infotech )

What could work?

If combined iGate Patni entity, instead of focusing on new customers, follow the strategy of increasing share of wallet of existing customers then this might work. Combined entity has developed other credentials also i.e. new service lines and new geographies There are very few common clients between iGate and Patni and if combined entity tries to increase work from existing clients using combined credentials of additional service line and geographical coverage then this might work.

Bigger is better and small is beautiful. But what would you say for two small firms who have combined and in the process neither became big nor remained small. They are just right for Amul Chocolates! ( Celebrate whatever the case !)