India's mega IT mergers often don't pay off

Mergers and acquisitions worth above US$500 million in India aren't exactly living up to expectations due to rushed integration and departure of the acquired management team, reveals a study by JP Morgan.

Acquiring companies sometimes end up hacking away the muscle, rather than the fat.

Mergers and acquisitions (M&As) worth above US$500 million in India's IT sector do not always live up to expectations due to various factors, such as rushed integration efforts and the departure of the acquired management team. 

Citing a study released by JP Morgan, The Economic Times reported Monday that merger deals valued at US$500 million and above provide a "feel-good factor" but might not produce results that reflect as positively. In fact, more often than not, these large acquisitions do not live up to the expectations of the acquiring company, JP Morgan said, noting that the phrase "damned if you do, damned if you don't" epitomizes the large-scale M&A in India's IT and business process outsourcing space. 

Such deals typically are inked with the goal, among others, of increasing the acquiring company's growth profile in a targeted new function, or reaching a broader customer base. However, most large-scale M&As do not meet many of the buyer's objectives and some deals have performed badly, JP Morgan added. 

Failed mergers could be due to an "inability to preserve the distinctiveness of the target" or little incentive for the acquired management executives to remain with the company. This is particularly true when a large portion of the value is paid upfront or when the acquiring company decides to streamline operations, "hacking away too much of the muscle of the target firm, instead of the fat", JP Morgan noted. 

The consulting firm added it could take 12 to 18 months after the acquisition had been announced before tangible value, if any, is generated for the investor. 

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