Mother of all M&A is here!

In what could result as the for mation of a mammoth Rs 4,000 crore-plus IT
distribution house in India, world's leading distributor Ingram Micro's buy
out of Sydney-based Tech Pacific for $493 million has created widespread
speculation as well as excitement in the domestic industry. The move, which is
expected to help Ingram significantly expand its APac business, also translates
into the biggest M&A activity from the Indian IT business perspective. The
only other merger/acquisition of this size was HP-Compaq, with combine revenues
touching Rs 3,750 crore at the time of merger.

The transaction is expected to be accretive to Ingram Micro's 2005 earnings
(excluding integration costs) and close by the end of 2004, subject to customary
closing conditions.

"This acquisition provides a giant leap forward in our regional
development. Tech Pacific is a market leader in two of the region's most
stable markets - Australia and New Zealand - as well as the rapidly growing,
emerging market of India," says Ingram Micro Inc. chairman and CEO Kent
Foster.

Tech Pacific CEO Shailendra Gupta and CFO Guy Freeland would be retained
while Ingram Micro Asia Pacific President, Alain Monie will continue to lead the
region. As a result of this acquisition, Ingram Micro Asia Pacific will nearly
double in size in terms of revenues and become the leading distributor in India,
Australia, New Zealand, Malaysia, Hong Kong and Singapore. The company also
expects its profitability for Asia Pacific to significantly improve, with
regional operating margins expected to strengthen in the next fiscal year.

PRINCIPALS GIVE THUMBS UP

The proposed acquisition has received positive reviews from all major
vendors across the country. Terming it as a very encouraging move towards
maturing of domestic IT business, principals feel that a consolidation of this
size will result in overall improvement of their as well as channel sales.

The acquisition will bring about greater coverage of the market, hence
increasing the demand for IT products. Also, since there will be an optimization
of resources as business will be driven by one entity instead of two,
profitability will improve for all the parties, ie, vendor, distributor and
partners," remarks Sanjeev Wad, Country Manager-Commercial Channels, HP
India.

Similar opinion is expressed by vendors like Sun, APC, TVSE, Systimax and ISS,
among others. "This consolidation will enable increased efficiencies in
terms of people, processes and finances as both the parties are highly
professional organization and a synergy between the two can only be expected to
yield positive results," feels Prasanna Kumar V, Sales Director-India and
SAARC, Systimax.

However, some of them do believe that the business dynamics, in view of this
development, might change. "We can expect smaller distribution houses to
become stronger and find more favor among principals. Also, leading systems
integrators might start enjoying direct billing from the vendor
organizations," says KP Unnikrishnan, Country Head-Marketing, Sun
Microsystems. Principals like IBM already has a practice in place where they
directly bill some of its leading partners. For companies like Sun-which sells
through both Ingram and Tech, and not Redington-looking at other distribution
alternatives becomes imminent as they would not like to be completely dependant
on a single agency.

Tyco's Country Manager KK Shetty endorses this possibility while remarking,
"Apart from national distributors, we also have regional distributors in
place.

Looking ahead, the latter may get more empowered and also many SI of ours can
expect closer relationships."

For players like TVSE, whose products are of a completely 'pull' nature,
Ingram-Tech Pac combine brings in an increased market coverage with lesser
resources to dedicate after them. "For us, both serve as a fulfillment
agency and with them coming together, the combined results will only be
better," states S Narendran, GM-Marketing, TVSE. On the other hand, vendors
like ISS­who have small revenue and just one distributor (Ingram in this case)-find
the development as an opportunity to leverage on the reseller base that the
other disty brings on board.

PARTNERS MAY FEEL THE PINCH

With the news of Ingram's buy-out spreading like wildfire in the Indian
channels, partners were seen thrown into a state of confusion. This development
has put them into an apprehensive mode and they expect to face numerous
challenges in the near future. These are largely with regards to a monopoly
being created in the distribution business with only Redington being the other
significant player.

Partners also fear serious implications on credit policies of the new entity.
"If previously one was availing a credit limit of Rs 1 crore both from
Ingram and Tech Pac, the new entity will not necessarily offer Rs 2 crore.
Logically, it would be less and that is a big issue for resellers," says
Ketan Patel of Creative Infotech.

Likewise with both distys having different credit periods, channel would see
tightening of payments. "We feel the credit periods will come down and
there would be an increased pressure on partners to rotate the money
faster," opines Hitesh Mody of Jaydee Electronics. He feels that while from
a long-term perspective this would help towards maturing of the market, in the
near-term profitability of many players would take a hit.

Further, it is also a widely-known fact that resellers used one disty against
other as a strong bargaining tool. "Now the power to bargain with a
much-larger company gets reduced for the partners. This in turn, will have a
telling on the margins they can make," remarks Vinay Dugar of Supreme
Technologies. However, he feels that the similar would hold true for vendors as
well since the new distribution entity would do everything to improve upon its
profitability.

Kishore Jeswani of Pacific Infotech believes that the business will go on as
usual but significance of smaller players especially strong regional
distributors will get highlighted. "Vendors will like to have more choices
and in absence of another big national distributor, they would be forced to
align with RDs as well," adds he. Similar views are expressed by VK
Bhandari of Supertron Electronics as well, who feels that in days to come,
principals will increase their association with players like himself, by virtue
of strong reach in many regions.

Even systems integrators feel that vendors will now like to strengthen their
relationships with them in view of the new equations. "Vendors might want
to increase their direct business with the SIs as the merged distribution house
will now command a stronger position and could threaten to be more
demanding," says Ravi Verdes of Frontier Business Systems.

Whatever be the outcome, most of the partners Channels India spoke to,
confirmed the fears of margins coming under increased pressure. "We have to
further decrease our sub-distribution business and focus more on retail to
ensure that we remain profitable," remarks Vinay. Ketan too feels that
retail business would become the logical step for many resellers or they would
need to upgrade for solution-selling.

While certainly, these are early days to pass a judgment and the real effects
will only be felt once the formalities are through next year, many feel that
more consolidation in the distribution business is imminent as also the
possibility of other global players like Tech Data entering Indian shores. Also
with market opening up post WTO agreement roll-out in 2005, the domestic IT
business could work on dynamics never seen before in India.

GOLDIE