Facebook likes Indian tech products sector

After Facebook's acquisition of Little Eye Labs, there is a buzz that a few more such acquisitions are in the line

The Indian tech product market is not new to mergers and acquisitions, though there aren’t many to speak of. However, many believe the situation might change in the coming years.

For 2013, the sector saw 27 mergers and acquisitions (M&A). Of this, $220 million were spent across 10 deals, according to data from Venture Intelligence. The number is dismal if one looks at M&A deals in the services sector. Or for that matter, what smaller countries such as Israel have managed to achieve.

Small M&A transactions in the range of $20-30 million are common in Silicon Valley. Over 400 such transactions happened last year. Israeli companies accounted for around a fifth of these. India had only a couple of transactions to speak of. According to information technology (IT) product think-tank iSpirt, this should change.

Facebook’s announcement on Wednesday regarding the acquisition of Bangalore-based Little Eye Labs will perhaps act as a catalyst for this trend. More importantly, this deal validates that the Indian technology sector is much more than just services play, say industry experts.

“I think the deal is a validation of the fact that Indian talent is desired by large global companies,” said Ravi Gururaj, chairman, Nasscom Product Council.

“The deal will, to some extent, lower the barriers and improve sentiment for any other global players that may be looking at M&As in India. It is great that a large platform player like Facebook is now involved in India and has familiarised itself with Indian processes like understanding of tax structures, accounting and due diligence, etc. The next time they see such an opportunity, they would be more comfortable in going ahead with it. Also, this would attract other global majors as there would be lesser apprehension,” added Gururaj.

After the Facebook announcement, there is a buzz that a few more such acquisitions are in the pipeline. iSpirt said it was involved in a few such deals. Last year, it hosted a round-table in the US to showcase Indian IT product companies to several global majors. The round-table was attended by M&A heads of various global companies, including Facebook.

“The intent to acquire in India is high, as they are aware that India has a high talent pool. During the round-table, we found that though they were interested to connect with Indian product firms, they did not know how to do that,” said Jay Pullur, head M&A initiative at iSpirt. To facilitate such transactions, iSpirt is in the process of launching “associate membership programme”.

“A lot of companies from the US said, ‘Do not give us just names, but tell us more about these companies’. So under this programme, we will curate some of the interesting firms and then the conversation of M&As can take place,” added Pullur.

The Indian start-up ecosystem is already witnessing some action. Gluster, an open source storage software company was acquired by Red Hat in 2011. PE player Silver Lake made its first India investment by backing Bangalore-based Eka Software Solutions. Druva that has its office in Pune managed to raise $25 million in a series C round of funding.

Many also believe that the start-up ecosystem in India is also preparing start-ups to be better prepared for such opportunities. “To say that this acquisition will lead to hordes of acquisition in the product space in India will be a bit far-fetched. But the transaction is important as this demonstrates that Indian start-ups can develop technology for global markets,” said Aashish Bhinde, executve director, Avendus.

Bhinde feels that this does mark evolution of the product space in India. “It will take at least two to four years for India to see what countries like Israel have managed to do. But globally clients are interested in companies that have presence in mobile or analytics space,” he added.

Sandeep Singhal of Nexus Venture Partners agrees with Bhinde's observation. "The quality of technical talent at start-ups in India is world class, and in many cases the solutions being developed here are better than what we are seeing in the valley. However, the domestic ecosystem lacks strong sales, marketing and product management skills, so beyond a certain stage, companies with global ambitions have to relocate to the US to gain access to this talent. It will take some time for this talent to develop in India, and that will only happen if local customers start buying from Indian start-ups," he said.