Growing through mergers & acquisitions
Mergers and acquisitions are a great way to grow. But there are some things that no expert can prepare you for -- such as what to do on the first day in office after the deal is inked and the party is over.
I’d like to describe one such journey here – the story of how we at SSI started out as a one centre IT training company in the southern city of Chennai in India, and how over the next 10-12 years we have grown to a global software services firm. Today, a significant part of our equity is held by foreign institutional investors, the bulk of our revenues come from the USA, and non-Indian employees make up nearly a third of our global workforce.
Our journey has been fascinating not just because we grew revenue, employees, customers, and market capitalisation. The journey has been fascinating also because we learned to grow across cultures, to manage size, to keep our balance as the industry soared in the 1990s and crashed in the early 2000s.
In 1991, SSI started off as an IT training company with a focus on emerging technologies. Ten years later, we had become the third largest IT training company in India.
Around the mid-nineties, we also started and grew a software services business. There were two aspects to this business.
The first was to take advantage of the then significant opportunities in staff augmentation – placing skilled programmers from India at client sites in the USA. This business was run as a subsidiary based in the US and it was profitable and healthy till the slowdown of 2000.
The second aspect of our software services business was the birth of SSI Technologies as a consulting and services division within SSI Ltd.
We had a problem, though. We were late entrants to the software development business.
Like all late entrants, we searched for a way to make a mark. To acquire world-class capabilities. To grow.
A lot of other small and starting out software development companies too shared that ambition.
What made us different was that we had nearly 10 years of positive cash flows behind us from our training business. We had the experience of an IPO in 1994. We had an appreciation of the US market from our staff augmentation business. And we had a hungry management team, impatient to grow. This combination of factors made it almost a given that we would look for inorganic growth.
That opportunity first came in August 1999 when we acquired Delaware based Indigo International, Inc. Indigo had a proven software product family and domain focus in the securities space.
In January 2000, we acquired majority stake in 3rd Agenda, a web design and development company. This was done to complement SSI’s e-commerce and online initiatives.
In December 2000, we acquired the US based AlbionOrion Company, LLC through a cash-and-stock deal. The AOC acquisition gave SSI domain expertise and client relationships in several new verticals and horizontals. Most importantly, it gave us access to clients that SSI as a purely Indian company would have found difficult to reach in any reasonable length of time. AOC’s clientele include government agencies in Wyoming, Massachusetts, Minnesota and other states, and a wide range of Fortune 1000 corporations.
Most recently, in February 2003, we acquired India’s second biggest IT training company, Aptech Ltd, and hived off our training business into Aptech.
Going purely by the numbers, the M&A strategy has certainly been instrumental in rapidly growing both our training and our software services businesses.
Today Aptech is the largest IT training company in India and some neighbouring countries.
And starting from almost scratch in June 1999, our consulting and software services business had revenues of about Rs 2.65 billion ($ 58 m) in June 2002, our most recent completed fiscal year.
But of course, the numbers do not tell the whole story.
The numbers do not even begin to capture the wealth of learning of the past 2-3 years. They do not reflect our sometimes breakneck but always exciting journey from a startup to a global services provider.
An M&A usually starts off with somebody – usually an investment banker – bringing compatible companies together and hoping for chemistry to happen.
There are all sorts of professionals to help you with the process. For a not inconsiderable fee, accountants will review financials, analysts will forecast revenues and profits, and lawyers will chart out possible legal potholes and speed breakers.
The services these folks provide are invaluable. They analyse. They give estimates. They lay roadmaps.
But they don’t – in fact they can’t – tell you what to do on your first day in office after the deal is inked and the party is over.
I’d like to share with you some of the insights we have gained. Maybe they will be useful when you set out on your own journeys.
Insight 1 - Know what you want
When we set out to acquire Indigo, it wasn’t an obvious candidate. The management was in disarray, morale was low, and there were financial and legal implications with some clients.
But when we looked beyond these negatives, we found solid technological capability and robust products. Our assessment then was that given a stable development environment and a strong marketing push, Indigo was a potential winner. Four years after the acquisition, I’m delighted to say the Indigo acquisition jump-started the securities practice at SSI and was key to our developing a JV with Nasdaq. Today, the securities practice is a significant contributor to our revenues and profitability.
We acquired AlbionOrion for entirely different reasons. We have always been convinced that that the only way to grow in the USA was as a local company. AOC was an amalgamation of Orion Consulting with 18 years experience in delivering enterprise class solutions to Fortune 1000 companies, and Albion International with eight years experience in delivering solutions to government agencies. Each was well managed, had loyal customers, and was seen as a true-blue local. The only reason they were up for sale was that they needed offshore capability to grow. In our mind, the SSI-AOC story was an idea whose time had come.
When SSI acquired control of Aptech, we achieved two goals: SSI achieved a separation of its training and software services business into two reasonably-sized listed companies, and Aptech became the number one training company in India. Now six months after the event, we are seeing the benefits of integrating common back-end functions like content development, administration and support at Aptech, and are starting to dominate market share by leveraging on our combined branding strengths and experiences in all our markets.
Insight 2 - Time it right
You may want to buy a company, but have you read the market right? In hindsight, I would say we timed one of our software services acquisitions perfectly, and could have done better on the other two. I also think we timed our training acquisition just right.
We think our Indigo acquisition was perfectly timed. We saw the potential in the company, made our move quickly, and positioned ourselves in time to partner with Nasdaq. This combination of events gave us the perfect entry into the highly competitive and specialised securities market.
The AlbionOrion and 3rd Agenda acquisitions seemed well timed when we did the deals in 2000. But what we hadn’t foreseen was that the business environment would worsen drastically shortly afterwards and would stay that way for a long period of time.
3rd Agenda was the tip of the iceberg in our strategy then to expand significantly into vertical portals, e-shopping, e-learning and so on. Fact is, the sentiment against online anything just swung away and is only now beginning to turn back. If it does, we are ready.
AlbionOrion was more complicated. It took us a long time to integrate cultures and processes between the rest of the company and AOC. AOC had little or no experience in managing cross-border sales and delivery, and we had little or no experience in working the local US customer relationships.
In retrospect, the smartest thing we did was to learn slowly. We allowed structures and processes to evolve. It took time, but what took root was a strong culture of trust and sharing that would not have been possible had we accelerated the process.
What worked against us was that in the time it took us to present a cohesive and integrated cross-border company to the customer, the world had changed. Customers who were all set to sign up contracts that involved onsite, offsite and offshore work suddenly found that in a down economy, their priority was next month’s payroll and not next year’s software application.
We hung in, didn’t give up on our vision, and kept pegging away to fine tune our processes. I’m happy to say that three years after the acquisition, we are beginning to see results of that effort.
In recent contracts, including a Minnesota government contract for $13 million, we pitched, and will deliver as a globally integrated team.
The Aptech acquisition came at a time when we were looking for a way to separate our training and software services businesses without hurting valuations of either. Aptech was a great brand but was suffering from poor cash flows. On the other hand, we thought the management had robust strategies for expanding the business – all they needed was leadership and capital. What made the deal doubly attractive was that despite good fundamentals, Aptech’s valuation was depressed in line with other tech companies. So we used the opportunity to acquire Aptech at an attractive price point for our shareholders.
Insight 3 - Budget generously for people time. Then double it.
M&As are about people. In an industry that is powered almost solely by the expertise, experience, and abilities of knowledge workers, people - their skills, their motivation, and their commitment to common values - are central to the enterprise.
One of the central issues in any M&A is that companies evolve their own distinctive work cultures. When two or more companies merge, you are asking people to let go of some parts of their culture and accept another way of doing things. This is a difficult thing to do. Even the most enlightened and accommodating individual will find it hard to go to office one day and change his or her mindset to work.
It’s relatively easy to adopt a new logo, new stationery, and new calling cards. It’s more difficult to adapt to new ways of reporting, executing, and compensation.
Managing expectations is a big challenge. In our own case, it took us several months to unravel the layers of promises, half-promises and outright commitments made to people when we took over Indigo. Balancing the need to reward talent and retain people with the need to maintain fiscal prudence was one of the most difficult things that we have ever done.
That experience helped enormously when we acquired AOC. It gave us roadmaps to determine tricky compensation and role responsibility issues as three cultures – Albion, Orion and SSI – merged. It took us a lot longer to handle the sensitivities involved in dealing with the many cross-national, cross-cultural, and cross-border issues that came up.
It takes a lot of time in such situations for people to feel reassured and comfortable about their changed roles within the organisation.
We took that time. We didn’t hurry matters. My executive team and I very often played the role of neutral umpires as field teams explored each other’s capabilities to take a ball and run the distance. This was a critical part of building clearly understood hand-off points in a cross-border business model.
In the case of the Aptech acquisition, things were relatively easier since both sets of employees were from the same industry and same culture and had realistic expectations from the merger. We communicated upfront that there would be no large scale closure of training centres and retrenchments since we intended to retain the majority of centres and training brands. On the other hand, we also told everyone that over a six month period, we needed to rationalise common overheads like administration, content development, and marketing support. Those six months are now over and we have achieved what we wanted to without undue stress. These days, Aptech is in fact hiring to execute on its revitalised business plan.
Final insight – Don’t cry over split milk
There comes a time after every M&A when you wonder, Would we have done some things differently if we had to do them all over again?
Of course we would. How many of us would live our lives exactly the same way again? But hindsight is self-indulgence beyond a point. The big challenge in business is to spot an opportunity, and to use your learning and experience to take informed risks.
To repeat a cliche, a ship is safest in a harbour. But that is not where it is meant to be.
So if there is one central lesson in our journey, it is this: plot your course, prepare for the journey, and let the trade winds catch your sail.
Travel in hope, with zest and zeal.