The Hindu Business Line : `Gauge the prime reason why the target wants to be acquired'

Meet Mr Narasimha Nayak, Calsoft's Chief Financial Officer (CFO), who has over two decades of experience in diverse areas such as finance, controls and audit, systems implementation, and most importantly M&A (mergers and acquisitions).

Calsoft or California Software Co Ltd (www.calsoft.co.in) , founded in 1992, has nearly a thousand employees. A chronological list of the company's acquisitions till date runs as follows: Team Frontline Ltd, Kochi (October 2004); American Healthnet Inc, Nebraska, US (March 2005); Webspectrum Software Ltd, Bangalore (April 2005); Informed Decisions Corp, Alameda, US (October 2005); Codex Co Ltd, Tokyo (August 2006); and Inatech Solutions Ltd, UK and Inatech Infosolutions Pvt Ltd, Bangalore (September 2006).

Prior to joining Calsoft in February 2005, Mr Nayak had worked as CFO with Helios & Matheson IT Ltd, where he was responsible for the overall F&A (finance and accounting) activities with a special focus on assisting the group's ambitious M&A strategy. The group acquired four companies between 2001 and 2004 and witnessed a jump in revenues - a compounded annual growth rate of over 54 per cent - in the four financial years of his tenure, he reminisces.

A post-graduate in management (1981-1983) from the Indian Institute of Management, Ahmedabad, and a commerce graduate (1981) from Loyola College, Chennai, Mr Nayak is a member of the Institute of Internal Auditors. Here is his take on a few questions from Business Line:

As CFO, what has been your role in business strategy?

Finance function's input is crucial for setting yearly business direction, and tracking to see if the results of strategy adopted are working out. There is also increasing focus today from the compliances and corporate governance angle, including risk management practices to be factored into business strategy and structuring. To cite a specific example, in Calsoft, the finance function has been involved with business functional heads from the start to finish in all the six acquisitions including screening, due diligence and post-completion, in putting financial tracking measures in place.

How do you screen a potential acquisition target?

Our company's rationale is that any acquisition should make sense in terms of its target segments and solution offerings suite and strengthen synergies with our existing solution offerings and business segments. We also definitely look for a committed management team/promoters of the acquired company who will stay and grow the business post acquisition of the company for a minimum defined period of time at least. Besides this, the usual financial parameters such as expected investment and major risks/concerns are screened to see if it makes sense in principle before we decide to proceed to a valuation and /or formal due diligence prior to finalising any deal. One qualitative factor that is also important to gauge is the prime reason - stated or unstated - that the acquisition target has for expressing interest to be acquired.

Calsoft has seen a series of M&A deals. How far are they successful? What have been the specific issues?

We have till date, since October 2004, made six acquisitions. Calsoft plans to continue its dual growth strategy - organic growth combined with prudent and focused acquisition that brings synergies to its customer offerings.

In most of the acquisitions we are satisfied with the progress achieved till date. There have been some concern on consolidated profit margins not growing to the extent of consolidated revenue growth - as in some of the acquired firms the margins were either not high or negative when we took over and it has taken more time than planned to complete the process of turnaround/margin improvement. We hope to improve this in the coming years.

What are the top five financial metrics that you always keep track of?

The important ones are: revenues, profit margins, operating and net profits, earnings per share, cash and receivables balances.

Have there been instances where you found Indian accounting standards falling short of the needs of software companies?

In my view, Indian accounting standards are on par for most part with the global standards. Our standards are generally not framed with any specific sectors in mind, and therefore interpretational ambiguities arise. A few areas that need to be amplified or fine-tuned with respect to software companies for enhancing uniform policy are: product development capitalisation, work-in-progress recognition, acquisition costs/goodwill, and stock options.

The new crop of talent that comes into the financial job market - what's it good at, and what, not?

I have generally found that with adequate training and exposure and assuming proper recruitment process/screening to choose the person suited to the role definition has been followed - there is no major problem with any talent recruited. However, there is growing competition for the `traditional' finance department of a company for talent from opportunities for similar qualification in segments such as business process outsourcing, knowledge process outsourcing, enterprise resource planning, functional consultancy, stock analysis, investment banking, and financial and management consulting which have gained increasing prominence.

Indian talent is almost on par with talent from elsewhere. Traditionally, however, Indians are quite comfortable with number crunching. In some cases, there is scope for improvement in descriptive and analytical reviews, in seeing the bigger picture and being more proactive, especially in follow-ups with operating departments.