Merger hungry

V Srinivasan wants to make Mumbai-based 3i Infotech a billion dollar software company. CEO Middle East finds out why a hunger for acquisitions and a technology developed here in the region are helping him on his way

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By  David Ingham Published  March 13, 2006

Merger Hungry|~||~||~|It’s no wonder that V Srinivasan, the CEO of Mumbai-based 3i Infotech, seems so cheerful. He has just seen his company, a provider of business management software, turn in a net profit and revenue growth of more than 50% for its most recent quarter. For the nine months to December 31, revenue reached US $68.8 million, putting it on track to do around US $100 million for the year. In global terms, 3i Infotech might still be a relative minnow, but the company is definitely one to watch. It began life in 1993 as ICICI Infotech, a back office unit of India’s ICICI financial group. It began providing IT services to non-ICICI clients in 1999, announced its name change in February 2005 and became a listed company in April 2005. If Srinivasan has his way, 3i Infotech’s recent growth could only be a taster of what is to come. His ambition is no less than to become a billion dollar company providing software to the largest corporations in the world. “Our sales are predominantly to the smaller and medium customers,” says Srinivasan. “What we are attempting is to sell into bigger companies and the Fortune 500. If we want to become a global player, we need to look at growing to US $500 million or US $1 billion in revenue, so maintaining our growth rate is very important.” Maintaining 40% to 45% growth, and reaching that billion-dollar mark, will require some bold moves, which helps explain Srinivasan’s apparent appetite for acquisitions. At the time of writing, the CEO has been involved in 11 company takeovers, out of which he believes nine transactions can be called a success. Rather than a potential headache that can distract and demoralise employees, Srinivasan sees mergers as an opportunity to add revenue, technology and customers, and increase profit margins. “Traditionally, Indian companies are in the software services industry, but we are predominantly into selling a packaged product. In the services business, profit stays proportionate or declines as volumes increase. But with us, the more software licenses we sell, the higher the profit margins,” he explains. Making acquisitions work is something few CEOs manage to do; acquiring a company from the Middle East and turning it into a key growth engine for your global business is rarer still. This, however, is exactly what 3i Infotech has done. The company in question, Insyst, began life back in the 1980s in Dubai. It developed software for the insurance, distribution and manufacturing sectors and, over the years, built up a solid base of small and medium sized customers. Although its focus was mainly on the Middle East, everything was chugging along nicely when ICICI Infotech (as 3i Infotech was then known) came calling in late 2001. What particularly interested 3i was Insyst’s flagship product, called Orion. Orion is what IT pundits call a packaged ERP product, a type of software that companies use to run their back-end processes such as human resources, distribution and finance (for comparisons, think Oracle Applications and SAP R/3). ICICI Infotech, then still predominantly focused on the financial services sector, saw a product that it could tweak, modify and sell in volume to companies across the world. Hari Padmanabhan, Insyst’s managing director, sold the company in a deal reported to be worth around US $10 million and he remains in Dubai as the company’s executive director and president. His decision to sell up and stay with the company is paying off so far. In the few years since Insyst was acquired, Orion has been expanded, improved and is now a key revenue driver for 3i Infotech’s entire global business. “When [Orion] was only sold in the Middle East, it had limited features,” says Srinivasan. “We have considerably enhanced the features… and that’s why we have been able to take it into new markets. We’ve taken it to India, the Far East and even the US. We now have 25 sites in the US.” When 3i Infotech snapped up Insyst, the company’s annual revenue was around US $2.5 to $3 million. In this financial year, which ends in March, Insyst’s products are expected to contribute between 30% and 40% of the company’s entire turnover. Srinivasan says there are several aspects to making mergers work. “First of all, the cultural and mindset fit of the acquired company CEO is very important,” he says. “Unless your mindset and the CEO of the other company’s mindset match, it is very difficult.” If the mindset fit isn’t right, the next thing he says he looks for is whether or not the company can be managed without the founder or CEO. This requires delving into the second line management and working out how good they are and whether or not they will stay with the company post-acquisition. If the CEO decides to stay, Srinivasan says it is imperative to give him or her a lot of space and freedom in which to work. Decisions then have to be made on sales, marketing and product development. “If you are acquiring a company for its customer base, you retain the marketing organisation and try to shift the development organisation to the back-end in India,” he says. Padmanabhan says that ‘space’ has been key for him since the takeover. He insists he still feels like an entrepreneur, but that he has the sales, marketing and development resources of a corporate to fall back on. “We now call ourselves an entrepreneurial corporate,” says Padmanabhan. “We are very entrepreneurial in everything we do, but we have the strengths of a corporate.” Srinivasan is certain that there are still plenty of promising young companies waiting to be taken over: He receives at least ten proposals a month from fledgling businesses looking for investment. When a company does make the grade, persuading people to sell isn’t too difficult because, as he says, “techies aren’t terribly good with money”. “They think that if developing the product costs one million or two million, an additional half a million is OK and they can market the product.” Srinivasan explains. “But in reality, the development takes one million [and] marketing takes ten million. Within a few years, they get in a financial jam and they either close down or sell.” If you are a technology entrepreneur sitting and waiting for a bid to come in, the discouraging news is that Insyst could prove to be a one-off for the Middle East. “We have not yet been able to find that kind of innovation elsewhere in the Middle East,” says Srinivasan. If the region is to produce more companies with global potential, he suggests there has to be more mentoring of promising individuals and companies. “Generally, people think that by creating infrastructure, innovation is going to happen. The right mentoring has to be there and if it isn’t, innovation isn’t going to happen.” Nevertheless, Padmanabhan is hopeful that the adoption of technology by regional governments and the creation of industry hubs could spur creativity. “There will perhaps be a point at which people realise there is a possibility to do new stuff here,” he says. Right now, 3i Infotech’s focus is on finding companies in the US that can provide it with a ready-made customer base. The acquisition last year of FormulaWare, a provider of ERP software for the process manufacturing industry, added around 65 customers, giving 3i a total base of around 90 ERP customers in the US. “That number creates awareness,” says Srinivasan, the kind of awareness that 3i hopes will propel it into the major league of software companies. If it does get there, a company from the Middle East will have played a significant part in helping it on its way.||**||

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