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Critical evaluation on M&A in IT companies: A case study on Infosys Technologies Ltd.
The aim of the research is to evaluate the activity of Mergers and Acquisitions as well as the consolidation that is taking place in the IT sector of India with a special emphasis on Multi National Enterprises. The research will focus on deducing conclusions on the corporate and business level strategies followed within Infosys Technologies Ltd and relate the case to the Indian IT industry as a whole.
To achieve the above mentioned aim, the following objectives are formulated:
- To understand the current state and potential of the Indian IT industry by analyzing its strengths and weaknesses.
- To study the trends in outward foreign direct investment (OFDI) that is related to IT sector in India.
- To evaluate the performance of Indian IT companies (MNC's) which are involved in international M&A's in the recent past.
- To throw light on the corporate and business level strategies implemented at Infosys Technologies Ltd and hence relate the case to a wider scenario.
The proposed research would be of interest to the emerging corporate companies in the Indian IT industry as it would provide valuable insights into the trends and the process of Mergers and Acquisitions happening at the international level.
Infosys is an Indian based IT company which specializes in IT, BPO and Engineering services which cuts across many business verticals. The company has been strategically shifting its operations into technology consulting and is directly competing with giants like Accenture India (a subsidiary of Accenture plc) and IBM which have long been established in this domain. With the entry of foreign companies into India, the market space for consulting and IT services companies is becoming crowded and the companies are involved in a tough fight for market share. On the other hand the IT sector is growing rapidly with annual revenues touching $70 billion. IT business in India displayed a resilience and tenacity to the global financial crisis and is not as much affected like in the US and Europe. Infosys is going global and is acquiring companies abroad and is also keen towards strategic alliances and horizontal mergers (Infosys, 2009). With this strategy of expanding globally it has recently acquired, McCamish Systems LLC in USA and Mainstream Software Pvt Limited in Australia. It is also rumored to buy out few other companies in various locations also in the list is Axon Group PLC, UK.
This part of the research proposal gives a brief description on the research being carried out on the subject of M&A in the Indian IT industry as well as the outward foreign direct investment by Multinational Companies in the IT sector.
Indian IT Industry and its footprint abroad
IT industry has been a growth engine for Indian economy since the last decade. In the last five years, IT exports have more than tripled with enhanced service offerings, diversified geographic base and focus on new verticals (Ramachandran, 2006). The affinity towards cross-border mergers and acquisitions by Indian IT firms is mainly due to the lack of opportunities in the domestic market. The inertia in the private sector of India towards computerization has led the software companies to provide services to international clients. The trend of foreign direct investment both inward and outward began way back in 1991 after the liberalization of Indian economy which provided a real boost to the IT industry. Post liberalization era proved to be very fruitful for the Indian economy and for the IT sector in particular. Five years from then the software exports quintupled due to global shortage of software professionals. There was a striking increase of export revenue from $128 million in 1990-91 to $700 million in 1995-96.
Infosys Technologies Ltd. was the first Indian IT company to be listed in the NASDAQ stock exchange. This step by Infosys paved a golden path for other companies which entered into the foreign markets later on. The total size in terms of revenues of Indian IT industry is estimated at $60bn as of 2009. A total of 2.23 million people are directly employed whereas an additional 226,000 work force is employed indirectly in related services that depend on the IT sector. IT industry in India constituted for 5.8% of the GDP in 2009 as against 1.2% in 1998 (NASSCOM, 2009). The current mood of the IT sector is "cautious optimism".
Mergers and Acquisitions by Indian Firms
Research in the segment of OFDI (Outward Foreign Direct Investment) suggests that the Mergers and Acquisitions happening in the home country (within India) are reaping more results than the one taking place outside the country. The reason for this phenomenon might be the advantage of consolidation efficiencies and investor confidence (Forbes, 2008). The above statement is also backed up by the fact that the Indian companies which are making cross border acquisitions in developed countries like the Unites States and United Kingdom are underperforming in overall market returns. In spite of this poor performance, Indian firms have continued to venture abroad with $23bn worth of acquisitions in the last decade. The trend of cross-border acquisitions is interestingly more dominant in the smaller firms which are not listed Forbes. According to Anushri Bhandari of Watsonwyatt.com, acquirers in the high-tech sector are at a higher risk of failure when compared to the other sectors. In the IT industry which is a part of the high-tech sector, excess returns after the acquisition is reduced by 33% on an average at the end of one year after the deal. Due to heavy fragmentation in the high-tech sector, most acquirers are not able to achieve excess returns even after few years of the deal because of seeking expertise in an unrelated segment.
Why Indian Companies venture abroad? This question is answered in the literature with enough empirical data. The literature says, cross-border acquisitions are due to several reasons out of which few are:
Economic Factors: The growth in international M&A by Indian IT firms can be attributed to the overall strength and prosperity of the Indian economy. Increase in the value of Rupee backed up by the performance of stock markets as well as the high interest rates abroad have boosted M&A activity for years.
Competitiveness: Many Indian firms are venturing abroad to explore new markets and acquire expertise in research and development. Other striking for cross-border acquisitions is to build a global brand image (Banerjee, 2005). This factor of competitiveness is influencing more of the companies in IT sector than any other sector as the companies enter new markets in search of 'domain expertise' (Sengupta, 2006).
The methodology followed for conducting research acts as a foundation to the entire process of research and will determine the means for reaching at the conclusions. The methodology as understood by the researcher describes the way in which the research is carried out and deals with the techniques employed to collect data from primary and secondary sources. It also deals with how the data has been processed and furnished to obtain valuable conclusions and findings at the end of the research.
According to Dash (1993), academic research is about exploring and understanding social phenomena which are educational in nature, in this process academic research deals with questions that can be investigated in a satisfactory manner, and the methods which enable such satisfactory investigation.
The research paradigm adopted in the dissertation will be a blend of both positivism and anti-positivism (phenomenology). In view of the fact that the proposed research needs quantitative methods of analysis which follow the principles of empiricism like that of surveys, Positivist paradigm is followed. Anti-positivist or Phenomenological paradigm is used because a Case study is being carried out which involves observation and firsthand experiencing than just relying on secondary data.
The research Design and Approach is based on the Saunders Onion Model which suggests the layer wise approach (Saunders, 2000). This model advocates the top down approach of research starting from the outer layer of onion i.e., having a clear research philosophy, which is having positivism, interpretive, and realism philosophy and then moving inside the onion to have a reasonable research approach which may be deductive or inductive, like wise moving to the inner core of the onion for the collection of data through sampling, interviews, secondary data, questionnaires etc.
Well conducted probability samples provide the researcher with the ability to gather information from a relatively small number of members of a large population and accurately generalize the results to the entire population. In addition, probability samples enable the researcher to calculate statistics that indicate the precision of the data (Fairfax, 2003).
The sampling procedures for this study would be a mixture of both Probabilistic and Non-Probabilistic sampling methods. The methods would be, Judgmental Sampling and Convenience sampling in the Non-Probabilistic methods because the study demands understanding the trends in international takeovers by Indian IT industry with an emphasis on the strategies followed by various corporate firms. Convenience sampling would be the most predominantly used sampling procedure in this research as the researcher is going to choose the persons to interview based on his convenience. In the Probabilistic methods of sampling, the researcher would employ, simple random sampling and cluster sampling in view of their relevance and aptness to the research.
Data collection Methods
As the study is dependent mostly on secondary sources of data like research papers, the resources needed are uninterrupted access to e-sources which is available from the University digital library. At times when the Primary research is carried out as a part of the case study, the researcher can make arrangements to establish the communication channel between the resource persons via telephone, email and direct meetings whenever necessary. Apart from this, there are no special resources required for the study.
The proposed study will take into account the secondary data available on the subject and then shall rely on the Primary data by examining an organization keenly as a part of the case study. The research methodology comprises of questionnaires and in-depth interviews which provide necessary qualitative data for carrying out the research. The type of methodology being employed is Grounded theory and a bottom-up approach would be followed in achieving the research objectives. The information obtained from questionnaires and interviews is finally analyzed and appropriate conclusions are made. The findings are presented in the form of a report and are delivered as recommendations.
To analyze the data collected through primary and secondary sources, the researcher employs various mathematical and logical techniques available for simplifying and synthesizing the data. The methods of data analysis in this research include qualitative analysis as well as quantitative analysis. In qualitative analysis, Grounded Theory is used dominantly over other techniques because of its robust applicability and reliability. Analytic Induction and Logical Analysis which involves pictorial representation of data like flow charts, matrices, graphs and charts will also be an appropriate data analysis technique for carrying out the proposed research. Microsoft Excel would be rigorously used to build the graphs, bar charts and pie charts accordingly.
Validity and Reliability
The research conducted using primary sources of data is prone to errors especially sampling errors and reliability issues. At each stage of the research while collecting data as well as analyzing it, the researcher need to take due care of these creeping errors and should arrive at foolproof conclusions.
To avoid reliability issues which arise due to participant bias which is the most common form of sampling error, simple random sampling technique will be used. In this technique, the researcher would first prepare an exhaustive list of all members from the interest group and from this list the sample is drawn giving equal chance for each member of the list to be drawn for conducting interview.
Ethical Considerations and Access Negotiation
The researcher would like to employ purely ethical means of data collection with due permissions and front door access to the data required from the organization being examined. As the rationale of the research justifies the way how the research is useful for the organization, the researcher can negotiate fair means of access to the organization to do case study.
- Read Literature
- Finalise Objectives
- Draft Literature Review
- Read Methodology Literature
- Devise Research Approach
- Draft Research Strategy and Method
- Develop Questionnaire
- Pilot Test and Revise Questionnaire
- Administer Questionnaire
- Enter Data into Computer
- Analyse Data
- Update literature read
- Complete remaining chapters
- Submit to tutor and await feedback
- Print, bind
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- Banerjee, G, (2004), 'Mergers and Acquisitions: Year of deals', Business World.
- Dash, N.K. (1993). Research Paradigms in Education: Towards a Resolution. Journal of Indian Education 19(2), pp1-6.
- Fairfax County Department (2003), Overview of Sampling Procedures. Alexandria: American Statistical Association. [Online] Available at: http://www.fairfaxcounty.gov/demogrph/pdf/samplingprocedures.pdf [Accessed on 10th March, 2010]
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- Saunders, M. L. ( 2000). In Research Methods for Business Students: Fourth Edition. New Jersey: Prentice Hall.
- Sengupta, S. (2006), 'India Races Into M&A Top3': Business World, September 18, 2006.
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- "Technology: IT Services", Goldman Sachs Global Investment Research, September 2004
- Theodor, K & Ninon, K (2004), 'Information sensitivity of High-Tech Industries: evidence from merger announcements', Applied Financial Economics.