As per a study by investment banking major JP Morgan of all M&A deals valued at $500 million or above, the 'feel- good factor' that the prospect of a large acquisition sometimes induces may be 'more psychological' and may not square with the subsequent track record.
"Large mergers or acquisitions in this sector, much more often than not, don't live up to the expectations of the acquirer. Damned if you do, damned if you don't - this phrase seems to epitomise the large-scale M&A action in the Indian IT/BPO outsourcing space," JP Morgan said in its report.
Big-ticket M&As in Indian IT ordinarily have several objectives like introducing or raising growth profile in a distinct new function, selling the acquired capability into the broader base of the acquirer's existing clients and achieving sufficient scalable offshore flow-through over time to scale and break even on margins.
"Our finding is that most large-scale M&As do not meet many of their objectives," it said, while adding that some deals have in fact done very badly.
"It could be due to inability to preserve the distinctiveness of the target, little incentive for target management to stay, especially if a fairly large portion of the consideration value is paid upfront, and hacking away too much of the muscle of the target firm, instead of the fat," it added.
JP Morgan said that historically, the market has been initially sceptical of larger mergers of listed entities, especially the deals involving merger of a larger company into that of a comparatively smaller size.
"We find that it can be 12-18 months after a merger announcement that tangible value emerges (if it happens) for the investor, as the acquirer sets about tackling the initial burden-of-proof," it added