Subba’s Serendipitous moments

October 2, 2009

Cisco’s brilliant acquisition of Tandberg

Recent acquisitions by Dell and Xerox have something in common. Both acquired companies which are far away from their core competencies in an effort to find stable growth. They acquired predominantly U.S. centric IT services firms. I explained my disappointment with Dell’s acquisition of Perot Systems here. Xerox recent acquisition of ACS also evoked a similar thinking in me. It is very difficult for a pure play product / technology organization to blend well with a pure play services organization. The organizational DNA are too different, growth trajectories are quite different, organizational processes lend itself to little synergy. In short, I am not very high on such acquisition moves.

Cisco is different.

Cisco announced an all- cash offer to acquire Tandberg for $ 3 billion. Tandberg — a Norwegian company sells smaller and less priced video conferencing systems. This is a perfect fit for Cisco’s more expensive TelePresence systems which has been a great success. I think this is a brilliant acquisition since Tandberg’s gross margins is 66% and has clients in US and Europe. This acquisition would enable Cisco to sell the Tandberg products to companies which cannot afford the TelePresence. With this acquisition, Cisco would dominate the video conferencing systems for some time. More importantly the acquisition came in quite cheap since Cisco just paid 11% premium over Tandberg’s closing price.

Cisco has always acquired companies that in some way or the other generated more Internet traffic creating in turn demand for its core business — the networking hardware business. The way it is going to unleash its Unified Computing strategy will of course be interesting and one has to wait and see how it provides the synergy to the networking hardware business. Cisco’s ability to shake off entrenched players in fairly established market segments will also be evident in a couple of years.

Over the last 5 years Cisco has acquired 40 companies — both big and small and they have helped Cisco plug the gaps in the technology and product roadmaps admirably well. They also have had little problems integrating them into the Cisco model.

Cisco has $35 billion in cash which means further acquisitions are on the way. I only hope they don’t go with the flavor of the month and acquire another U.S. based IT services firms !


July 25, 2009

Singapore’s research institutes — suffering from split personality?

Is there a synergy between advanced technology R&D and standard training to mid career professionals so that they could garner yet another certification?

Or is it merely a case of making some revenues to cover their costs?

Or worse still, is it a way for the R&D institute to do some “notional national service” when there’s no local company to use the outputs produced by the R&D organization?

The strategies adopted by Singapore’s R&D institutions especially in the IT sector has always confounded me. The latest one is the Data Storage Institute and while on the one hand they claim they do cutting edge research, they are also offering standard training courses which can lead to industry certification (SNIA).

The milestones listed doesn’t talk about any breakthroughs in research or development but merely administrative or routine events. Has DSI lost it completely?

Well as an organization, sure they have resources to do both, but should they be doing both in the first place?

The data storage industry has changed significantly over the years and if DSI doesn’t find a clear and compelling reason to exist, they should redirect their strengths somewhere. It seems to me that there’s a huge disconnect between their areas of research and the aspirations of the local industry. The result — it is research for research sake and if at all there’s any benefit, it is for the MNCs who in any case can source such research from anywhere in the world.

This leads to the question — Does DSI have a compelling reason to exist?

Long timers in Singapore would possibly recognize that the Institute of Systems Science or ISS as it was popularly known had always a confused identity– It was a research institute, training institute, did consulting projects and many other things. It used multiple identities to its advantage sometimes, but despite being given dollops of dollars, it didn’t produce anything outstanding — be in in research, consulting or training. Finally it divested its research activities and became a training service provider. It does provide good training, but the courses it offers can be provided by any training service provider in the private sector.

Looks like DSI is going the same way as ISS?

Sometime back I wrote that Singapore’s research and development needs a rethink. It led to several interesting discussions amongst friends and quite a few work in the R&D sector. The surprising thing is that they do agree that it needs a rethink.

So, when will this happen?

April 14, 2009

Tech Mahindra gets Satyam — Pays more, interesting challenges ahead

Satyam Computer Services ranked as India’s 4th largest outsourcer by revenues (after Infosys, TCS ,Wipro) and which went through some very anxious times following the scandal brought about by its founder has found a new owner.

After a bidding war where only 3 parties participated (Larsen & Toubro, Tech Mahindra and US investor Wilbur Ross), the prize has gone to Tech Mahindra.

Tech Mahindra offer of Rs. 58 per share (U.S $1.16) was 21% higher than the next bidder (Larsen And Toubro who already own a 12% stake) The offer price is also 23% higher than its highest traded price since the news of the scam broke out in early January.

Since the auditors Deloitte and KPMG are in the process of rewriting the accounts it is difficult to value the company. But based on a number of sources, Satyam’s annual revenues are in the range of $1.5 billion -$1.7 billion (down from projected revenues of $2.1 billion for 2008) with an operating margin of 3% while Tech Mahindra’s margins are in the range of 22% with revenues of $900 million. No one knows the extent of liabilities and also the exposure of the firm to some of the class action suits that’s likely to follow in the US.

Hence at the acquisition price, Tech Mahindra has paid a big premium and also brought some big challenges just to add $ 1.2 billion and a 3% margin business. Did Tech Mahindra over value Satyam? I certainly think so.

But as they say Value lies in the eyes of the beholder!

Tech Mahindra will have some big challenges not only in funding the acquisition but also running the Satyam operation. It is one thing to run a business where one client (British Telecom holding a 31% share) accounts for close to 70% of the business and another to deal with a diversified client base with poor operational efficiencies. Tech Mahindra will also have to learn to manage a work force almost twice its own size and dispersed globally.

Tech Mahindra will also have to figure out whether they want to keep this as an independent entity with a different name or do a possible merger. I think the advantages to be gained by an immediate merger may be limited in the short term since there are no synergies to be realized.

None of these challenges are easy. It would be interesting to watch the turnaround.

Satyam caretakers — the interim Board members like Karnik, Deepak Parekh and others did a great job transitioning it from a broken and rudderless ship to finding a good caretaker and owner. The entire Indian IT industry also played a mature role in not poaching Satyam’s clients or its employees.