The Hindu Business Line : Courting the glare

Why do small and medium-sized IT companies get listed and brave all that spotlight? eWorld discovered the answers are not as obvious as you would expect them to be.

ASK a cynic what prompts a company to go to the market with an Initial Public Offering (IPO) and the answer you may get is that they want to fool around with others' money. And there has never been any dearth of cynics as far as the role of markets goes.

A cynical outlook, however, must have been the last thing on the minds of the promoters of Saksoft, a Chennai-based software company catering to financial services clients, that went to the markets with a puny Rs 7.5 crore-IPO in March.

Out of a project outlay of Rs 14.6 crore, part financed through the IPO, a sum of Rs 9 crore has been earmarked for expansion of its software development centre at Noida and the balance Rs 5 crore allocated towards acquisitions.

Since half the project cost was to be financed through internal accruals, the balance could have come to Saksoft from any source. Then why did Saksoft choose to subject itself to the rigorous scrutiny and loads of expectations that come with listing? Not to mention, all that the IPO process itself involves.

"Funds would not have been an issue as it was a small amount and Saksoft could have easily raised it from anywhere. Being listed gets a company in the public eye and increases the pressure to put in place strict corporate governance norms. That makes it easier for the smaller companies to approach their customers in the west with greater confidence," says Kamesh Gandhi of Centrum Capital Ltd, the lead managers to the issue.

Even the smallest Indian companies in the software sector are servicing Fortune 500/Global 1000 clients in their chosen area of specialisation.

Given such a scenario, "credibility" becomes an important factor. For instance, for Saksoft, its top client, Citibank, accounted for 37 per cent of its revenues in the first six months of 2004-05, with other prominent names such as Morgan Stanley, Standard Chartered Bank and DBS Bank figuring in the roster of clients. Saksoft acknowledges that its customers would feel more comfortable about dealing with the company now that it is listed.

"Besides raising money for expansion and acquisition, the purpose of the IPO is also to be able to attract and retain senior talent. We think that the added expectations will put pressure on the management team to continue to grow the company to the levels it can," says a top executive at Saksoft.

Global visibility

If we extend this idea of credibility and visibility associated with listing to specialised software product or services company, these prospects are even more alluring for a larger set of companies.

Consider the Bangalore-based Sasken Communication Technologies, which has filed for a draft IPO recently with the securities regulator and hopes that getting listed will be a "shot in the arm" for its efforts to enhance its stature in the global markets. "We agree that there are certain underlying reasons (to get listed) that are not so well articulated. The kind of visibility you get in this process is very high. We were doing fine, but by initiating the IPO process, a well-known secret has just got revealed. We have a good story to tell the world and now it is coming out," says Sasken's Chief Marketing Officer, Swaminathan Krishnan.

As a company focused on research and development outsourcing services to the telecom vertical, Sasken has received venture capital funding to the tune of $22 million in the past few months from three different investors: Nortel Networks, Nokia Growth Partners, the VC arm of mobile handset maker, Nokia and New Enterprise Associates, US-based venture capital firm.

But the company is staging a comeback from the rough patch it went through a couple of years ago following the IT/telecom meltdown. Having recovered, it is now trying to reach the next higher level.

"We have always behaved like a listed company in terms of corporate governance, ethics, financial accounting and having a professional board that complies with strict norms that have yet to become operational. We went through a rough patch and were honest about it. We feel that listing will give us that additional impetus to rise to expectations and share our values with the rest of the world," says Krishnan.

Internally, Krishnan says that the decision to go in for the IPO was also prompted by the fact that it can now offer an opportunity for "value appropriation" to its staff through Employee Stock Options (ESOPs) and the company would find it easier to attract talent.

Acquisition currency

Apart from these aspects, getting listed creates a "good currency" for domestic software companies to play a key role in the mergers and acquisitions arena.

Take for instance, Four Soft, a company specialising in creating enterprise solutions for the transportation and logistics market.

Since its IPO in February last year, it has been quite active, making small acquisitions to complement their existing line of business.

It started with the acquisition of the Netherlands-based Cargomate, a transportation and freight forwarding software solutions company last October, where the consideration of $1.9 million was payable 87.5 per cent in cash, and 12.5 per cent in equity shares of Four Soft.

It recently acquired two more companies: Comex Frontier Pte Ltd, a Singapore-based software solutions provider and MY Comex Sdn Bhd, a Malaysian eCommerce solutions provider for logistics.

A senior executive of Four Soft acknowledges that listing has offered them the required credibility to make acquisitions in the overseas markets. "The current acquisitions have been largely all-cash deals because of relatively small amounts involved."

But he adds that listing has given them the opportunity to "use their muscles for bigger acquisitions where shares can also be used as an acquisition currency".

Even a small company such as Saksoft has earmarked Rs 5 crore towards acquiring a company in the financial services space that has an attractive customer base and a good market image.

For Cranes Software International Ltd, currency for M&As was perhaps the most important factor to go in for listing. The company specialises in a range of products and services for the scientific and engineering community. It has grown from $1 million to $25 million in four years, largely on the strength of acquisitions.

It says the growth may not have been possible if it was not listed. Unlike the regular IPO route, Cranes was listed through a scheme of amalgamation with Eider Commercials and the stock started trading in late 2002.

"Our strategy was inorganic growth by acquiring niche engineering and scientific software products and using the cost advantage in India to grow them. For such acquisitions, it is very important for the selling company to have the confidence that you can pay, either in cash or through stocks. Getting listed gives you the flexibility to do all of that," says its managing director and co-founder, Asif Khader.

As a part of its growth plan, Cranes picked up some niche products companies synergistic/complementary to its existing product line.

The cynics can go take a walk, at least for now.

Picture by K. Ramesh Babu

eworld@thehindu.co.in

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