contact us
POV

IT Market and Provider Re-invention: Birlasoft + KPIT to Merge, Split, Disrupt

Bruce-Guptill-sq2
by Bruce Guptill
Birlasoft-KPIT

What is Happening?

The business and technology nature(s) of the merger-to-split between Noida-based Birlasoft and Pune-headquartered KPIT Technologies provides a great example of how both the pace and nature of tech-firm M&A are being disrupted.

As announced on 30 Jan. 2018, the two firms will merge to create a $700M (US) tech provider, which will then split into two publicly-traded IT providers. As briefed, we understand the process to be as follows: The two companies will merge, work through legal and financial requirements – a process expected to take about 12 months – and then split into a business/digital IT services provider (expected to keep the Birlasoft name) and an automotive and mobile software engineering and solutions provider (expected to retain the KPIT Technologies name). It is expected that the “new” Birlasoft will be managed by current CEO Anjan Lahiri, and the automotive engineering company will be run by current CEO & MD Kishor Patil.

From our point of view, the deal implies two things: A de facto swap of intellectual property and associated assets, and that the provider trend toward specialization of technology focus and services remains a strong factor driving marketplace change and provider re-invention.

Why is it Happening?

At the core, this merge-to-split deal is not about disrupting markets. It is about re-inventing to focus on specialization, in order to avoid disruption and enable competitive strength.

The expected year-long union as business assets and models are swapped and re-integrated can be an effective means of managing such a swap with minimal disruption, while enabling more (and more effective) sharing of IP through interaction tied to shared business goals and outcomes. The approach itself is not unique; we have seen variations used for decades. 

The specialization-driven approach also presents an aspect of the growing trend toward vertical integration as a business strategy. In this case, each firm is expected to assume and integrate capabilities and offerings specific to, or at least oriented toward, a type of vertical market. In the case of KPIT, that is automotive and mobile technology and systems; in the case of Birlasoft, it is enterprise digital enablement services and transformation solutions (traditionally focused on development, testing and analytics associated with ERP and CRM). The expected result is improved opportunity and ability for growth for each firm.

“We believe that if we segregate the two businesses, there will be sharper focus on each of the businesses, and both businesses will grow - that is really the rationale behind this merger and de-merger,” stated KPIT Technologies cofounder, chairman and group CEO Ravi Pandit in an interview with the Economic Times. “We believe that each of these businesses will have greater growth than what they are doing today. KPIT's engineering business is expected to grow at 15-20% with better profitability…. We believe that both the businesses should do well both on profitability as well as on growth because of the sharper focus on each of these two areas.”

Specialization and improved growth – if realized - should also help prevent disruption of the resulting two firms’ own business. Improved scale (financially and otherwise) should help each better compete for and profitably deliver more, and larger, deals.  Each should also be better positioned to attract more investment – again, assuming they are able to build and grow as expected.

Impact

While the Birlasoft-KPIT acquire-merge-split deal is different than most M&A deals, it’s not completely unusual to see different and complex M&A transactions in IT markets. The relatively recent Hewlett Packard acquisitions/splits/spinoffs provide examples. That being said, to paraphrase a well-known American comic book and movie line of dialogue: With great complexity comes greater risk of failure. Financially and organizationally, much remains to be accomplished to make the Birlasoft-KPIT merger-split successful.

Disruption also tends to be temporary and quickly overcome; what is disruptive today may be considered de rigueur tomorrow. Even the rumoured Dell – VMware “reverse acquisition” may provide a template for provider re-invention - if and when it occurs.  Look for a blog post on the implications of that situation within the next few days.

In this case, we don’t foresee significant disruption among either firm’s existing customers or partners. The “year of togetherness” planned should help Birlasoft and KPIT manage concerns and expectations of customers and partners to reduce potential disruptions. And we foresee less potential disruption among customers and partners once the two firms split apart, given their (expected) more-focused business strategy and models.

Once the companies split – assuming success -  a revitalized and refocused Birlasoft and KPIT are more likely to disrupt than be disrupted. KPIT will be one of the largest developers of embedded automotive and mobile software; Birlasoft will better able to scale and deliver digital transformation engagements, especially in its software engineering-centered traditional business.

ISG Research continually monitors provider business developments and disruptions, and provides insights for our enterprise and provider clients through our ISG Insights, Momentum, and Provider Lens outputs. For more information, please visit us at https://research.isg-one.com/.

Associated Insights


About the author

In his role as leader of ISG Insights’ overall research agenda, Bruce Guptill coordinates analysts’ focus on guidance regarding digital disruption, emerging technologies, market shifts and the changing value of enterprise IT for clients’ changing business needs. His own analysis and guidance focus on how disruptive technologies enable business innovation and improvement for enterprise clients, and how these in turn disrupt and reshape software and IT services providers’ business and markets. 

 

Related Content