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July 02, 2007

With Subex's acquisition-led growth endure?

Businessworld has an article pointing out the achievements and challenges facing Bangalore-based telecom software firm Subex which has specialized in growing through acquisitions.
After acquiring the firm, it immediately attacks costs by shifting software development and marketing operations to India, and by reducing the foreign sales force. Operational costs are slashed by as much as 40 per cent. “The whole valuation is dependent on this fact, because I know that I will make profits from the third month itself,” says Menon. According to him, Azure, which lost $10 million (Rs 41 crore) in 2005-06, was turned around in a quarter; the merged entity, Subex Azure, made profits of $15.32 million (Rs 67.5 crore) in 2006-07. Industry analysts are fairly satisfied with Azure’s integration but have cautioned a wait and watch approach on Syndesis.

...In the past, Subex used a combination of internal accruals, debt and equity to fund buy-outs. But that ran into problems with the Azure Solutions and Syndesis acquisitons. Azure took a full year of negotiations as it doubted the solidity of India’s stockmarket and Subex’s long-term stock value. For Syndesis, Subex initially planned on raising $200 million through foreign currency convertible bonds (FCCBs) and gold depository receipts. In the end, it could raise only $180 million (Rs 738 crore) in FCCBs, at a 5 per cent premium, after markets turned unfavourable.

...Locating funds at the right valuations will depend on how well Subex integrates Syndesis. Acquiring Syndesis made Subex the leader in fraud management and revenue assurance, with a 29 per cent market share, according to OSS Observer. This put it alongside heavyweights like Amdocs, IBM, Oracle and Telcordia.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.