iGate Corp.’s shares had fallen by about 23% in the run-up to the Patni Computer Systems Ltd deal. After the deal was consummated earlier this month, the stock has fallen by another 17% on the Nasdaq. Investors are evidently concerned about the high debt involved in the transaction and the fact that iGate would have to integrate a company many times larger than itself.
The company’s results for the quarter ended December and the ensuing commentary haven’t helped calm investors’ nerves either. Volumes grew at a sluggish 2.1% last quarter.
More importantly, iGate’s chief executive officer Phaneesh Murthy told analysts on a post-earnings call that there was no budget flush towards the end of the year, indicating that there is no pent-up demand in the system, unlike last year. Consequently, the March 2011 quarter is expected to be softer compared with the March 2010 quarter.
Murthy added that American companies are concerned that much of the profit growth in 2010 was on account of cost cutting and not revenue growth. This is leading to some caution with client budgets.
iGate shares fell by a little over 2% after the results were announced on Wednesday. The shares are now 36% lower since the news that the company was contemplating an acquisition of Patni. While it’s true that the acquisition debt is very high in proportion to iGate’s current balance sheet size, servicing the debt shouldn’t be much of an issue. This is because Patni’s cash flows are materially higher than the interest burden that will arise on account of the acquisition debt.
As far as integration issues are concerned, Murthy explained to analysts on the call that primarily he would be engaged in the integration of the sales forces of the two companies, which amounts to about 400 employees. Whether delivery happens at a Patni centre or an iGate centre isn’t a big issue, according to him.
These arguments don’t seem to have allayed investor concerns. Yet, if iGate is able to derive value from the acquisition, investors could end up with a windfall, especially given the sharp correction in the stock.
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