Predicting The Trends For Future Alliances Marketing Essay

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Strategic Alliance is one of the best ways of tracking the business

sentiment of the country. And the trends for the year 2010 show that the

corporate sentiment - at least as far as deal making is concerned - was at

an all time high. In fact, the year saw the same level of activity as 2007,

which was considered by many to be the bumper year for deal making.

If 2007 saw the spectacular Tata Steel takeover of Corus, then 2010 was

the year when Bharti got its hands on Zain. Indeed, mega deals

dominated the M&A space. Deal activities grew rapidly specially in India

because India recovered from the post Lehman Brothers meltdown faster

than most countries around the world. The economic conditions at home

and the rapid growth of the economy allowed Indian businessmen to

throw caution to the winds and raise money in search of suitable targets.

The year 2011 is poised to be yet another significant year for Indian

strategic alliances & mergers as business confidence is sky high, liquidity

is sufficient and there is an increased focus among Indian players to

identify strategic growth opportunities.

Acquiring a company is just the first step though. The real issues crop up

in integrating the acquired company and this is where many companies

falter. International studies show that integration problem crops up in

60% of acquired companies. But Indian companies so far seem to have

done reasonably well in merging acquired company operations with

parent operations. Many alliances don't live up to the expectations

because they stumble on the integration of technology and operations.

We have all heard about deals where stars seemed aligned but synergies

remained elusive. In these cases, the acquirer and target may have had

complementary strategies and finances, but the integration of technology

and operations are often proved difficult, usually because it did not

receive adequate consideration during due diligence.

Acknowledgement

Completing a task is not usually a one man effort and it often requires

the help, support, guidance and blessings of others. Hence I take this

opportunity to extend my thanks to all those people who have directly

and indirectly helped me to complete this dissertation.

I am deeply indebted to Prof. (Dr.) J.P. Saxena, my mentor & faculty

guide Amity Business School, Noida, for nudging my thoughts to decide

upon the subject of dissertation and providing me inputs from time to

time to make the topic more apt and succinct.

I also express my sincere gratitude to my parents, peers & friends for

their support and encouragement throughout the study. Their

suggestions and views have been quite handy in giving this study a

proper shape and keep me abreast with the latest developments in the

business front.

Literature Review

Strategic Alliance - a general overview

In the last two decades, alliances have become a central part of most

companies' competitive and growth strategies. Alliances help firms

strengthen their competitive position by enhancing market power (Kogut,

1991), increasing efficiencies (Ahuja, 2000), accessing new or critical

resources or capabilities (Rothaermel & Boeker, 2008), and entering new

markets (Garcia-Canal, Duarte, Criado, & Llaneza, 2002). By the turn of

this century many of the world's largest companies had over 20% of their

assets, and over 30% of their annual research expenditures, tied up in

such relationships (Ernst, 2004). A study by Partner Alliances reported

that over 80% of Fortune 1000 CEOs believed that alliances would

account for almost 26% of their companies' revenues in 2007-08 (Kale,

Singh, & Bell, 2009).

Strategic alliances are agreements between companies (partners) to

reach objectives of common interest. Strategic alliances are among the

various options which companies can use to achieve their goals; they are

based on cooperation between companies (Mockler, 1999). In practice,

they would be all relationships between companies, with the exception of

a) transactions (acquisitions, sales, loans) based on short-term contracts

(while a transaction from a multi-year agreement between a supplier and

a buyer could be an alliance); b) agreements related to activities that are

not important, or not strategic for the partners, for example a multi-year

agreement for a service provided (outsourcing) (Pellicelli, 2003).

Strategic alliance can be described as a process wherein participants

willingly modify their basic business practices with a purpose to reduce

duplication and waste while facilitating improved performance (Frankel,

Whipple and Frayer, 1996). In simple words, a strategic alliance is

sometimes just referred to as "partnership" that offers businesses a

chance to join forces for a mutually beneficial opportunity and sustained

competitive advantage (Yi Wei, 2007).

A strategic alliance is a partnership between two or more firms that unite

to pursue a set of agreed upon goals but remain independent subsequent

to the formation of the alliance to contribute and to share benefits on a

continuing basis in one or more key strategic areas, e.g. technology,

products. (Yoshino & Rangan, 1995)

A strategic alliance is a particular mode of inter-organizational

relationship in which the partners make substantial investments in

developing a long-term collaborative effort, and common orientation.

(Faulkner, 1995)

A strategic alliance is a contractual, temporary relationship between

companies remaining independent, aimed at reducing the uncertainty

around the realization of the partners' strategic objectives (for which the

partners are mutually dependent) by means of coordinating or jointly

executing one or several of the companies' activities. Each of the

partners are able to exert considerable influence upon the management

or policy of the alliance. The partners are financially involved, although

by definition not through participation, and share the costs, profits and

risks of the strategic alliance. (Douma, 1997)

Strategic alliances are long-term agreements between firms that go

beyond normal market transactions but fall short of merger. Forms

include joint ventures, licenses, long-term supply agreements, and other

kinds of inter-firm relationships. (Porter, 1990)

Strategic alliance was also perceived as long-term co-operative

partnerships involving vendor, customer, competitor, or industry-related

firms and was used to achieve some competitive advantage (Stafford,

1994, p.64).

Strategic alliances are voluntary arrangements between firms involving

exchange, sharing, or co-development of products, technologies, or

services. (Gulati, 1998)

Regardless of the broad variety of definitions for strategic alliance, all

have certain similarities (Spekman, 1998):

- Each has goals that are both compatible and directly related to the

partner's strategic intent,

- Each has the commitment of, and access to, the resources of its

partners and,

Each represents an opportunity for organizational learning.

Arino et al. (2001) define alliance as a formal agreement between two or

more business organizations to pursue a set of private and common goals

through the sharing of resources (e.g., intellectual property, people,

capital, organizational capabilities, and physical assets) in contexts

involving contested markets and uncertainty over outcomes. According to

Hill (2005), strategic alliance is referred as the cooperative agreements

between potential or actual competitors; it is a relationship between

firms to create more value than they can on their own. However, his

definition narrowed the partner selection to competitors.

Strategic Alliances as Corporate Strategy

Beginning in the 1960s, corporate strategy was defined by Andrews

(1967) as "the pattern of corporate objectives and the policies and plans

intended to achieve them." When corporate strategy is used in the most

classical sense in business studies, there is no problem with using it in

the sense that Chandler (1962) indicated in his work Strategy and

Structure: "a corporate entity's determination of its fundamental long-

term objectives, the adoption of modes of conduct necessary to

accomplish these objectives, and the allocation of resources."

The definition given by Itami (1984), we can define it as "that which

expresses the basic orientation of organizational activities in relation to

the environment, and that which carries out the fundamental selection of

circumstances for an organization's various activities and the

fundamental determination of policy for the coordination of its various

activities."

When focusing upon the internal resources of a firm, the role of

corporate strategy is to accumulate highly scarce managerial resources

and provide the competence to skillfully apply them. In addition, when

considering relations with other firms, the managerial resources that

corporate strategy takes as its object are not confined to the resources of

their own firm; the managerial resources of other firms also fall under

this category. And the competence to apply the managerial resources is

the competence to unify their resources with those of other firms,

coordinate them, and make them work together.

The aforementioned presents a new challenging issue to managers who

have only attended to the accumulation and distribution of their own

resources. This new challenging issue is, namely, the accumulation of

highly scarce managerial resources in their own firm via mutual relations

with other firms, and the skillful application of the accumulated

managerial resources through mutual relations with other firms. And in

this sense, it is at the point when managers realize that they must take

into account mutual relations with other firms and plan and execute a

corporate strategy that they are first able to grasp alliances, as one of the

strategic methods, in connection with the internal factors of the firm.

Indeed, the meaning of the fact that alliances are "strategic" when they

are grasped in conjunction with a firm's internal factors can be sought in

the following two points:

a) Alliances are used to acquire the managerial resources of other firms

and accumulate highly scarce managerial resources

b) Alliances are used to skillfully apply the managerial resources of their

own firm and those of alliance partners.

With respect to the various alliances that firms weave, only by carefully

approaching them from the above two points can we clear up the

important unresolved issue indicated by Badaracco, namely the reason

for engaging in alliances.

Need for Strategic Alliances

If the achievement of competitive advantage through the accumulation of

highly scarce managerial resources is one of the strategic issues for the

firm, then the primary means of accumulating these resources are

thought to be arm's-length relations, internal activities, mergers and

acquisitions (M&A) and strategic alliances (Lewis, 1990). As Doz and

Hamel (1998) indicate that the races for the world and the future require

the development of insights, capabilities, and infrastructures at an ever-

faster pace that few companies can master, and yet they must be swifter

if strategic advantage is to be obtained. If a company cannot position

itself quickly and correctly, it will miss important opportunities and be

far lagged behind the tidal wave, therefore the strategic alliance between

different firms have emerged as the vehicle of choice for many companies

in both the race for the world and the race for the future (Doz and

Hamel, 1998). Strategic alliance has become a favorable choice for many

multinational companies as a strategy responding to rapid economic

development and increasingly fierce competition in the global market

(Gulroy, 1993). Compared with other widely adopted strategies, such as

mergers and acquisitions, major companies prefer to choose the 'bond'

option rather than the 'buy' or 'build' option to stimulate growth and

increase corporate wealth (Pekar and Margulis, 2003, p.50). With the

prevalence of the strategic alliance in recent decades especially in the

last years of the 20th century, Cyrus and Freidham (1999) believe that it

will become the primary way of global consolidation in the near future,

and it may also become the most powerful tool to maintain a firm's

sustainable competitive edge. Just as Gilroy (1993) stated that the

strategic alliance has become a favour for many multinational companies

as a strategy responding to the rapid economic and technological

development, globalization and dynamic nature of the market.

Formation of Alliances - favorable factors

Previous studies have suggested that partner selection favors formation

of alliances with firms that are relationally "embedded" through prior

direct ties and structurally embedded though network connections to

common third partners (Gulati & Gargiulo, 1999; Podolny, 1994). This is

not surprising, given the role of social interaction among partner firms in

alliances in the development of the trust and cohesion necessary for

mutually beneficial interfirm relationships (Larson, 1992; Li & Rowley,

1999; Mohr & Spekman, 1994; Ring & Van de Ven, 1992; Seabright,

Levinthal, & Fichman, 1992).

According to the nature and life span of alliances, it can also be classified

into three different forms of strategic alliances: horizontal, vertical and

diagonal alliance. Specifically, horizontal strategic alliances are formed

with competitors within the same industry; this kind of alliance is often

formed for R&D purposes. Vertical strategic alliances can be formed with

suppliers or customers in several value chain activities. While diagonal

strategic alliances are formed with partners from other industries

(Bronder and Pritzi, 1992, p416). To put the strategy in a more concrete

form, Arino et al.'s (2001) state that alliance's forms can be varied in a

number of ways, it could be performed under the forms like equity joint

ventures, non-equity collaborative arrangements, licensing or franchising

agreements, management contracts, and long-term supply contracts.

While with alliances, companies can access global markets and

contribute to economic development without steep exposure to market

and political turmoil (Cyrus and Freidheim, 1999, p.48). The motivations

for the formation of an alliance can range from purely economic reasons

(e.g., search for scale, efficiency, or risk sharing) to more complex

strategic ones (e.g., learning new technologies, seeking political

advantage) (Arino, et al., 2001).

Firstly, companies are seeking for co-option during its globalizing

process. Co-option turns potential competitors into allies and providers

the complementary goods and services that allow new business to

develop and usually multinational companies seek partners with similar

products who have a good knowledge of local market and channels of

distribution in order to share the risk during the expansion of the global

market (Bronder and Pritzi, 1992; Doz and Hamel, 1998; Cullen and

Parboteeach, 2005). The privileged market access of some countries

sometimes can be a reason for MNC to search for alliance under the

globalization movement (Bleeke and Ernst, 1991; Bronder and Pritzi,

1992; Doz and Hamel, 1998).

Secondly, co-specialization has become a more and more attractive force

behind the strategic alliance. It is the synergistic value creation that

results from the combination of previously separate resources, positions,

skills and knowledge sources. By bringing the resources of two or more

companies together, strategic alliances often provide the most efficient

size to conduct a particular business (Bronder and Pritzi, 1992; Cullen

and Parboteeach, 2005). Through the way of alliances, partners can

contribute their unique and differentiated resources to the success of

their allies, i.e. skills, R&D, brands, networks, as well as tangible and

intangible assets (Bronder and Pritzi, 1992; Doz and Hamel, 1998).

Alliance may also be an avenue for learning and internalizing new skills

from its partners, in particular those that are tacit, collective and

embedded (Bronder and Pritzi, 1992; Doz and Hamel, 1998). Therefore, it

is self-evident that strategic alliance is central to the corporate strategy

and it is significant and unavoidable for the global reaching step in the

world economy.

To a nutshell, when confronting with the newly opening markets,

intensified competition, and the need for increased scale, many CEOs

have put the formation of cross-border alliances on their agendas since

1990s. To international managers, the strategic benefits are compelling

under the synergy effects among partners; and it is a flexible and

efficient channel to crack new markets, to gain skills, know-how, or

products, and to share risks or resources (Bleeke and Ernst, 1991).

Break of Alliances

Although alliance break-ups and member withdrawal are also common,

running as high as 50 percent in some industries, much less is known

about these events (Broschak, 2004: 608; Burt, 2000; Podolny & Page,

1998). Nevertheless, an understanding of them is basic to the

development of realistic and informative models of alliance behavior and

network dynamics (Kogut, 1989). Alliance break-ups alter the network

positions of the firms involved, their immediate partners, and more

socially distant firms, as an initial break-up triggers others (Nohria,

1992; Powell et al., 2005). Resource scarcity and misalignment of

alliance partners' resources and interests create friction that may trigger

member withdrawal (Baker, Faulkner, & Fisher, 1998; Koka, Madhavan,

& Prescott, 2006; Rowley, Greve, Rao, Baum, & Shipilov, 2005).

Similarly, member withdrawal may occur when embeddedness is low.

Despite the growing popularity of strategic alliances, the success rate

remains low, and also a number of recent studies have noted that the

failure rate of alliances is in the range of 50-60% (Spekman et al., 1996;

Dacin et al., 1997; Kok and Wildeman, 1998; Frerichs, 1999; Andersen

Consulting, 1999; Duysters et al., 1999; Kelly et al., 2002). This is about

the same rate identified in studies done by McKinsey and Company and

Coopers and Lybrand at the beginning of 1990s (Stafford, 1994, Kelly et

al., 2002).

Studies have shown that two thirds of all alliances experience severe

leadership and financing problems during the first two years (Bronder

and Pritzi, 1992, p.419). Evidence showing that even those ventures that

finally succeed must frequently overcome serious problems in their early

years (Kelly et al., 2002). For instance, Bleeke and Ernst (1993) found

out that 66% of cross-border alliances they studied confronted with

serious managerial problems in their first two years of the alliance. The

other study done by a Bain and Co. also indicated that in every ten

alliance relationships, five would fail to meet the partners' expectations

and of the other half, only two would last for more than four years (Rigby

and Buchanan, 1994).

Draulans et al. (2003) find that an inadequate capability to manage the

alliance is the main reason. As Robert E. Spekman state that leadership

played a key role to the success of alliances. Another frequently cited

reason is poor selection of alliance partners; due to competitive

pressures, many firms rush into alliances without adequate preparation

or understanding of their needs, the incompatibility of partners will lead

to insurmountable problems (Medcof, 1997; Dacin et al. 1997). Other

reasons that are often cited for the alliances failure include lack of trust

between partners, cultural conflicts, incompatible chemistry, unique risks

inherent in strategic alliances, and lastly focusing on alliance formation

rather than sustaining the alliance (Gomes-Casseres, 1998; Kelley et al.,

2002).

International alliances are increasingly central to the corporate success;

however, they often end up in divorce. As Fedor and Werther (1996,

p.39) point out that in many cross-boarder alliances, the failure stems

from the deal maker's concentration on strategies, financial, and legal

complexities, while largely ignoring issues of "cultural compatibility"

among the alliance partners. Therefore, cultural differences could

become a barrier to success, especially at the initial stage. Besides that,

the failure to build trust between partners in the early stage of the

alliance could be detrimental to further development to the next stage.

Trust building is also closely linked to the cultural compatibility between

partners. Stafford (1994, p.70) indicates that if partners lack compatible

cultures and expectations, the trust between partner employees may not

materialized, which will lead to inter-partner employee conflicts.

Introduction

Food & Beverage

Coffee consumption has risen sharply, almost doubling in between 1998

and 2008 from 50,000 metric tonnes in 1998 to 94,400 metric tonnes in

2008, according to India's Coffee Board. The growing coffee culture is

being driven by demand from the country's emerging middle classes but

India's retail coffee market remains highly fragmented and is dominated

by small street-side vendors. Local chains, including Café Coffee Day and

Barista account for less than a third of the total domestic market,

according to analysts.

The Deal:

Starbucks Corporation is an international coffee and coffeehouse chain

based in Seattle, Washington. Starbucks is the largest premium coffee

retail chain in the world with over 16,858 stores in 50 countries,

including over 11,000 in the United States, over 1000 in Canada, and

over 700 in the UK. Retail growth outside the US is now central to the

company's strategy. The first Starbucks location outside North America

opened in Tokyo, Japan, in 1996. Starbucks entered the U.K. market in

1998 with the $83 million acquisition of the then 60-outlet, UK-based

Seattle Coffee Company, re-branding all the stores as Starbucks. In

September 2002 Starbucks opened its first store in Latin America, in

Mexico City. In November 2010, Starbucks opened the first Central

American store in El Salvador's capital, San Salvador. In an investor

presentation, Starbucks International president John Culver said the

company hopes to operate at least 1,500 stores in mainland China by

2015. He also said that the company sees exciting growth prospects in

other emerging countries such as India and Brazil.

Tata Coffee is coffee company owned by the Tata Group. Tata Coffee is

Asia's largest coffee plantation company and the third-largest exporter of

instant coffee in the country. It produces more than 10,000 million tonne

of shade grown Arabica and Robusta coffees at its 19 estates in south

India. Its two instant coffee manufacturing facilities have a combined

installed capacity of 6,000 tonne. The company owns 19 coffee estates in

Southern India. The estates are spread across the districts of Coorg,

Chickmaglur and Hassan in Karnataka and Valparai district in Tamil

Nadu. Tata Coffee, one of the biggest suppliers of Arabica coffee beans

In a significant step toward market entry in India, U.S.-based Starbucks

Coffee Company on January, 2011 signed a non-binding memorandum of

understanding (MoU) with Tata Coffee. Starbucks and Tata Coffee

announced plans for a strategic alliance to bring Starbucks to India later

that year. Starbucks plans set up stores in Tata retail locations and hotels

in India, and also to source and roast coffee beans at Tata Coffee's

Kodagu facility. Starbucks is aiming to tap a market where consumption

of coffee has more than doubled to 100,000 metric tons from a decade

ago. In the areas of sourcing and roasting, Tata Coffee and Starbucks will

explore procuring green coffee from Tata Coffee estates and roasting in

Tata Coffee's existing roasting facilities. At a later phase, both will

consider jointly investing in additional facilities and roasting green coffee

for export to other markets.

Synergies/ Outcome:

"India is one of the most dynamic markets in the world with a diverse

culture and tremendous potential," said Starbucks Coffee Company

Chairman, President and CEO Howard Schultz. This MoU is the first step

in our entry to India. We are focused on exploring local sourcing and

roasting opportunities with the thousands of coffee farmers within the

Tata ecosystem. We believe India can be an important source for coffee

in the domestic market, as well as across the many regions globally

where Starbucks has operations."

Local Partner - For Starbucks, it requires a local partner to open retail

stores in Asia's third-largest economy as under India's foreign direct

investment regulation, a single-brand retailer is only allowed to control

up to 51% of a joint venture with an Indian partner.. Tata Coffee,

majority-owned by Tata Global Beverages Ltd., is a unit of India's second-

biggest industrial group. The knowledge and understanding of the Indian

market can be brought by Tata Global Beverages, because it has been in

this play for a while

Rising Exports - Coffee exports from India, Asia's third-biggest producer,

gained 56 percent last year, the Coffee Board said earlier this month.

Tata Coffee and its domestic rivals boosted shipments 56 percent to

292,550 metric tons. Given the scenario, Starbucks realised that forging

an alliance with Tata Coffee will increase their market share and expand

their reach to the world market.

The MoU will create avenues of collaboration between the two

companies for sourcing and roasting as Tata Coffee and Starbucks will

explore procuring high quality green coffee from Tata Coffee estates and

roasting in Tata Coffee's existing roasting facilities in Coorg in South

India. At a later phase, both will consider jointly investing in additional

facilities and roasting green coffee for export to other markets.

In addition, Tata and Starbucks will jointly explore the development of

Starbucks retail stores in associated retail outlets and hotels.

Two companies also will explore social projects to positively impact

communities in coffee growing regions where Tata operates.

The Indian group has deep experience in running food supplies, so it can

handle that part of the outlets. But in terms of running cafes, Tata has no

specific advantage, where Starbucks holds the expertise. Starbucks plans

to open standalone outlets in all big cities as well as inside Tata-owned

luxury hotels and retail stores,

The agreement provides a win-win situation for both partners. Tata can

leverage the Starbucks name, and vice versa. The entry of more players

means the market will grow. India can absorb up to an estimated 5,400

outlets; at the moment, the number is over 1,300.

IT Sector

The broader trend in the IT sector is that mid-size companies finding

difficult to grow, are looking to merge with business rivals or sell out.

The post-recession period has brought in large business orders for IT

behemoths and specialized companies, but generic mid-size IT firms

haven't benefited as much. Industry estimates peg the annual growth

rate of top-tier IT firms like Infosys and TCS at around 20-25% this fiscal,

while the corresponding growth rates for tier II companies are estimated

in the range of 10-15%. IT sector analysts go as far back as early 2008 to

pick up indications of consolidation in the IT sector. Mid-size IT firm

MindTree had then acquired Aztecsoft to boost its capabilities in

outsourced product development (OPD) and testing. Deals like these are

now becoming common and the trend is set to intensify in 2011.

According to data provided by Venture Intelligence, in 2010, the IT

sector saw 115 M&A deals-largely in the small and mid-sized IT space.

This figure was lower at 92 in 2009.

Arup Roy, senior research analyst at Gartner, says marginal players are

facing tough times. "We can expect more consolidation next year.

Companies that do not have the size and scale to take advantage of new

business opportunities will be obliterated," he said.

Avinash Vashistha, CEO of IT advisory firm Tholons, adds that apart from

the fact that mid-tier companies are losing big contracts to IT majors,

they are also not being able to customize or tweak business models to

execute smaller contracts. They follow a software factory model that is

suited for large contracts, which are typically won by the top 5 IT

companies.

Abhishek Shindadkar, research analyst with ICICI Securities, said that

generic mid-size companies are also affected by operational concerns

such as wage inflation and pressure to increase marketing spends.

MindTree has been reporting margins of 14-15% in recent quarters

whereas the figure for top-tier companies like Infosys and TCS has been

above 25%.

iGATE Corporation is an American information technology company

founded and based in Fremont, California with its operational

headquarters at Pittsburgh, Pennsylvania. The company specializes in

business data processing and uses a structure known as iTOPS

(integrated Technology and Operations Systems) to meet customer

demands. Services provided include: IT consulting; application

development, data warehousing, business intelligence solutions,

ERP/enterprise solutions, BPO/business service provisioning,

infrastructure management, testing/independent verification and

validation, and contact center services. Offices are located in 16

countries and serve businesses in various fields. While the US has long

been its operations center, the company is undergoing an aggressive

expansion into India. By 2012, the company wants to be a billion dollar

organization, for which association should be with 100 of the global 1000

clients.

Patni Computer Systems Ltd., a Mumbai based mid sized Software

Services firm is a provider of Information Technology services and

business solutions. The company employs over 15000 people, and has 23

international offices across the Americas, Europe, and Asia-Pacific, as

well as offshore development centres in 8 cities in India. Patni's clients

include more than 400 Fortune 1000 companies.

The Deal:

Nasdaq-listed iGate Corp. announced that it, along with its partner,

would acquire a majority stake in Mumbai-headquartered information

technology (IT) services company Patni Computer Systems Ltd for

around $1.22 billion (around Rs. 5,540 crores) in a deal that gives the

former scale in the IT services business and ends uncertainty about the

future of the latter, one of India's oldest IT services companies, but also

one which has been in the news as a possible target for acquisition for at

least four years. iGate will now have 63% stake in Patni. The acquisition

is among the biggest involving an Indian IT company. In 2006, EDS Corp.

acquired MphasiS BFL Ltd for Rs. 1,748 crores. And in 2005, Oracle

Corp. acquired i-flex Solutions Ltd for Rs. 4,090 crores. The takeover is

seen by analysts as a David and Goliath scenario. While Patni registered

revenues of $518.7 million in the 9 months ended September 2010, the

corresponding figure for iGate is less than half of that, at $199.5 million.

 

Patni

iGate

Revenues

178.80

74.80

Net profit

28.80

14.30

EPS

0.21

0.25

Employee strength

13,995

6,910

Active clients

282

80

Financials for Q3 2010 in $mn, except EPS in $

Synergies/Outcome:

Clients: Patni will also enable iGate to widen its client base and reduce

its dependence on a few clients. iGate's top 10 clients bring 84% of total

revenues versus Patni's 48%. The combination will now have 2 clients

that bring $100 million plus revenues, 2 clients that bring $15 million

plus revenues, and 36 clients in the $5 million plus league. General

Electric is one of the biggest customers for both companies and this is

expected to bring synergies.

Presence: Patni has roughly two employees for every one iGate has and

the combined strength of the two will be around 25,000 employees. And

while iGate has 82 customers, seven delivery centres and offices in 16

countries, Patni has 282 customers, 22 global delivery centres and offices

in 30 locations. Patni has good presence in the western and northern

Indian region, while iGate has offices in the south, which gives employees

good options to move around the country.

Business Verticals: The merger could result in a more competitive entity.

When a company does not have the width of verticals, then it is restricted

in terms of growth. Hence, Patni was unable to take on bigger deals or

huge orders.The two companies will now enjoy synergies in business

verticals. While 60% of iGate's revenues come from banking and finance,

30% of Patni's revenues come from insurance. By leveraging both

strengths, the companies plan to build a strong BFSI team. BFSI is the

fastest growing business segment for the IT sector. With the acquisition,

there should be scope for cross selling and improvement in margins.

Ownership: Patni Computers was already having trouble among three

founders of Patni-Narendra Patni, Gajendra Patni and Ashok Patni

regarding their share in the company. The acquisition will end ownership

woes in Patni and help the company build its pipeline in the banking and

financial services vertical, in which iGate earns a large chunk of its

revenues.

Revenue: The combined revenues of the merged entity, around $1 billion

in size, will help customers access more service lines and improved

domain expertise. It can also bid for large projects competing against IT

behemoths including TCS, Infy, Wipro and HCL. Smaller IT companies

have in recent times struggled for revenue growth and profitability, as

they are unable to offer scale efficiencies or attractive pay packages to

retain staff. From iGate's point of view, it will be a huge asset. Patni has

an application, development and maintenance business of at least $450

million (around Rs 2,025 crores). Its insurance business is around $240

million (around Rs 1,080 crores). Compare this with iGate's overall

revenue of $230 million (around Rs 1,035 crores),"

Amalgamation: The deal also reopens the argument for a combined tech

services and BPO play - as the transaction marries iGate's BPO-ish skills

with Patni's tech services and development platform. Overall,

combination will help customers get better service, access to more

service lines and deeper pools of expertise.

Debt: The biggest concerns that iGate officials point to is the cultural

integration between the two organizations as well as the debt on its

books. IGate, which is currently a zero debt company, will have debts in

its books for the next few years.

Attrition & Integration: iGate is less than half Patni's size. Other than

integration challenges, there will be employee attrition issue as well.

Steel Industry

Tata Steel, formerly known as TISCO and Tata Iron and Steel Company

Limited, is the world's seventh largest steel company, with an annual

crude steel capacity of 31 million tonnes. It is the largest private sector

steel company in India in terms of domestic production. Currently ranked

410th on Fortune Global 500, it is based in Jamshedpur, Jharkhand,

India. It is part of Tata Group of companies. Tata Steel is also India's

second-largest and second-most profitable company in private sector

Nippon Steel Corporation is the world's 4th largest steel producer by

volume.

The Deal:

In January 2011, Tata Steel said it has inked a joint venture agreement

with Nippon Steel for setting up a Rs 2,300-crore specialty steel-making

line having a capacity of 60,000 tonnes per annum at Jamshedpur to

cater to the domestic auto sector. The project is expected to be

operational in three years. Tata Steel would hold a majority 51% stake in

the unnamed joint venture entity while the Japanese major would have

the rest 49% stake. The project (Continuous Annealing and Processing

Line) will be set up at a capital cost of about Rs 2,300 crore and is

expected to come on stream in 2013.

Synergies/Outcomes:

The demand for small cars in India is rapidly growing and Tata Steel

aims to tap this growing market. The JV aims to capture the growing

demand for high-tensile auto-grade steel in India. Also, Nippon's

technology would help Tata Steel to tap the Japanese auto makers in the

Indian auto market.

The joint venture entity would source steel from Tata Steel's Jamshedpur

plant and use Nippon Steel's technology for production of high-grade

cold rolled steel sheet to meet the growing needs of the Indian

automobile sector.

Global auto majors like Honda, General Motors and Hyundai Motors

currently import steel for making cars. With this JV, Tata Steel hopes to

discourage the automakers from importing the special steel and, instead,

buy from Tata.

The two companies aim to capture more of the local demand for auto

steel, growing at 13-15 per cent a year. Tata Steel has already around 40

per cent share of the domestic auto steel market. Its European

subsidiary, Tata Steel Europe, too, has its own auto-grade technology.

But according to Tata Steel, the technology cannot be used in India.

Europe and India use different kinds of auto steel. In Europe, more

galvanized steel is used because of corrosion, snow issues, etc. In India,

it is more continuous annealing steel.

Also, the auto steel product development can now happen jointly in the

common R&D. Now, there is a group R&D which reports to both the

CEOs (Europe and India). The agenda is drawn and the mandate is given

that in auto steel we have to see what we can do.

NTPC Limited (formerly National Thermal Power Corporation) is the

largest state-owned power generating company in India. Forbes Global

2000 for 2009 ranked it 317th in the world. It is an Indian public sector

company listed on the Bombay Stock Exchange although at present the

Government of India holds 84.5 of its equity. With a current generating

capacity of 33194 MW, NTPC has embarked on plans to become a 75,000

MW company by 2017. It is premier power generation company in India

having expertise and strength in areas such as setting up of coal, gas and

hydro based power projects, operation and maintenance of power

stations and sale of power to various State power utilities and other bulk

customers. NTPC has developed comprehensive in-house expertise in

various facets of power generation from concept to commissioning,

efficient operation to nurturing of ecology and environment in

accordance with National Power Policy of the Government of India.

Bharat Heavy Electricals Limited (BHEL) is one of the oldest and largest

state-owned engineering and manufacturing enterprise in India in the

energy-related and infrastructure sector which includes Power, Railways,

Transmission and Distribution, Oil and Gas sectors and many more. It is

the 12th largest power equipment manufacturer in the world. BHEL was

established more than 50 years ago, ushering in the indigenous Heavy

Electrical Equipment industry in India. It is one of the leading

international companies in the field of power plant equipment with state-

of-the-art technologies. BHEL range of services extend from project

feasibility through design, manufacture, supply, erection and

commissioning to after sales-service of equipment required for

generation, transmission and distribution of coal, gas, hydro, nuclear and

non-conventional energy.

The Deal:

In April, 2008, NTPC-BHEL Power Projects formed a 50:50 JV firm

NBPPL, with a focus on engineering, procurement and construction

contracts, besides the manufacture and supply of equipment for power

plants. The JV has an order book of about Rs 450 crores. It is targeting

an order book of Rs 7,000 crores by the end of the current fiscal (2010-

11). At present, NBPPL is working on the 100-MW Namrup Power Station

in Assam and the 726-MW combined cycle power plant being set up by

ONGC Tripura Power Corporation at Palatana, in Tripura. It is also

executing the 500-MW Singrauli thermal power plant and the 600-MW

thermal power plant of Andhra Pradesh Power Generation Corporation

(APGENCO) at Rayalseema.

NTPC and BHEL Navaratna enterprises of the Government of India have

come together to harness their compatibility, common ownership, and

also common legacy for the development of Power Sector as whole. The

two companies have complementary strengths; BHEL is strong in

Project and Product Engineering, manufacturing and Erection and

commissioning and NTPC strength in being Project development &

management. NBPPL is created to leverage the core strengths &

synergies of the respective promoter companies and supplement their

EPC and equipment manufacturing capacities. This will help to meet the

huge emerging demand for setting up of new power projects in the

country.

Synergies/Outcome:

The prime objective of the Company is to enhance the capability and

capacity of the Power Sector and supplement the efforts of both the

promoter companies (NTPC and BHEL).

JV Company will also work as a EPC company (Engineering, Procurement

& Construction) to take up turn-key jobs of power plant with a view to

provide total business solution to the customer from concept to

commissioning.

Explore, secure and execute EPC contract(s) for Power Plants and other

Infrastructure Projects in India and abroad including plant engineering,

project management, quality assurance, quality control, procurement,

logistics, site management, erection and commissioning services.

To engage in manufacturing and supply of equipments for power plants

and other infrastructure projects in India and abroad.

Joint Venture manufactures main power plant equipment, such as

Turbine, Generator, Boiler to meet the growing demand of power in the

country.

The joint venture between state-run NTPC and BHEL should also focus to

establish manufacturing facility for Balance of Plant, such as Coal

Handling, Ash Handling Plant and also focus on building equipment other

than boilers, turbines and generators, as there is a dearth of companies

engaged in the construction of such machinery in the country. Currently,

there is a shortage of balance of plant (BOP) equipment in the market.