Bangalore: Nasdaq-listed iGate Corp. announced that it, along with its partner, would acquire a majority stake in Mumbai-headquartered information technology (IT) services company Patni Computer Systems Ltd for around $1.22 billion (around Rs 5,540 crore) in a deal that gives the former scale in the IT services business and ends uncertainty about the future of the latter, one of India’s oldest IT services companies, but also one which has been in the news as a possible target for acquisition for at least four years.
The acquisition is among the biggest involving an Indian IT company. In 2006, EDS Corp. acquired MphasiS BFL Ltd for Rs 1,748 crore. And in 2005, Oracle Corp. acquired i-flex Solutions Ltd for Rs 4,090 crore.
iGate chief executive Phaneesh Murthy said the consortium of iGate and private equity (PE) firm Apax Partners Llc has signed definitive agreements with the three founders of Patni—Narendra Patni, Gajendra Patni and Ashok Patni—to acquire their 45.6% stake, and with PE firm General Atlantic Llc for its 17.4% stake.
While there was much speculation about a “non-compete fee” that would be paid to the Patnis to ensure they didn’t start another IT services company, Murthy said no such fee has been paid. “The whole idea of such a deal is to go out there and compete,” he said.
“This is an extremely strategic move, giving us a much larger platform, access to much larger deals and more verticals to go after,” he added.
“Consolidation is the way to go for midsize companies,” said Milan Sheth, partner (advisory services) at audit and consulting firm Ernst and Young.
iGate reported revenue of $252 million and net profit of $45 million for the 12 months ended 30 September, while Patni reported revenue of $689 million and net profit of $134 million for the same period.
Patni has roughly two employees for every one iGate has and the combined strength of the two will be around 25,000 employees. And while iGate has 82 customers, seven delivery centres and offices in 16 countries, Patni has 282 customers, 22 global delivery centres and offices in 30 locations.
The acquisition price is Rs 503.50 a share (the company’s shares closed at Rs 463.85 on Monday), amounting to a total of $921 million. In keeping with Indian law, iGate will make, through subsidiaries, an open offer to shareholders of Patni to buy an additional 20% in the company at the same price. Assuming it does so, it will spend an additional $301 million.
Murthy said that the transaction will be completed in the first half of 2011, and will become “cash accretive” by 2012, on a cash earnings per share basis.
To finance the deal, iGate, which hitherto did not have debt on its books, will be taking on a debt of $700 million. Another $100 million will come from cash on its books. For the remaining, iGate has agreed to sell to Viscaria Pty Ltd, a company backed by funds advised by Apax Partners, $270 million of preferred stock convertible into common stock. The preferred stock investment by Viscaria may be increased by up to an additional $210 million based on the subscription in the open offer process and in the event that the company does not go ahead with a public offering.
For the debt component of $700 million, commitments have been secured from RBC Capital Markets and Jefferies and Co. Inc., Murthy said. RBC Capital is part of a leading provider of financial services, Royal Bank of Canada.
Jan Erik Aase, principal analyst at Forrester Research Inc., said that the combination of Patni and iGate is synergistic, and the sum of the two will be greater than the current strength of each.
Few customers would desert either company on account of the merger, he added, explaining that it isn’t easy to change vendors for application development and maintenance, the main service rendered by Indian IT services firms to their customers.
Patni will continue to be listed in India as a separate entity well into 2011, Murthy said.
“Do I want to continue with two separate listings for ever? Obviously not. We’ll take the call on a merger into a single entity when the time comes,” he added.
Nitin Padmanabhan of Indiabulls Securities Ltd said that while the price offer at Rs 503.50 per share is a fair valuation at a 12 times the estimated earnings of Patni in 2012, “there is no precedent to such a deal where a company acquires a company 2.5 times its size”. “Investors would like to wait and watch as to how the integration takes place once the acquisition is consummated,” he added.
Murthy agreed that integration could pose some challenges. “The leadership will work on that. But we believe that we will have the support of 25,000 employees in doing the work of integration,” he said.
The merger could result in a more competitive entity, said another analyst. “When a company does not have the width of verticals, then it is restricted in terms of growth. Hence, Patni was unable to take on bigger deals or huge orders. With the acquisition, there should be scope for cross selling and improvement in margins,” said Probir Rao, managing director and head of investment banking and capital markets (India) at Jefferies India Pvt. Ltd.
Surabhi Agarwal in New Delhi, Priyanka Pulla in Hyderabad, and Sneha Shah and Harini Subramani in Mumbai also contributed to this story.