Soon after the news of iGate Corp.’s bid for Patni Computer Systems Ltd became public in late November, its shares had fallen as much as 20% on the Nasdaq. The markets have since had over a month to digest the news, but iGate’s shares continue to languish.
Back then, there was a strong possibility that iGate would end up owning Patni, with help from private equity (PE) fund Apax Partners Llc. Now it almost looks certain. The markets’ primary concern would be that iGate is taking on too much on its plate. After all, Patni’s revenue and profit are 2.5 times and 2.8 times higher than that of iGate.
The good thing is that iGate seems to be getting considerable help from Apax. According to a Mint report, the PE fund will infuse funds into iGate by subscribing to a preferential issue of shares. Based on iGate’s filing with the US Securities and Exchange Commission, this should help it raise about $182 million (Rs820 crore). The Mint report adds that Apax will lend up to $500 million to iGate to finance the deal. Note that the total deal size is expected to be $1.2-1.3 billion, including the mandatory 20% open offer for minority shareholders. Apax is, therefore, financing more than 50% of the total fund requirement for the deal.
Graphic: Yogesh Kumar / Mint
Of course, iGate would still be taking on considerable debt on its own books to close the deal. At first look, this looks a bit scary considering that it currently has a balance sheet size of only $287 million. But note that the debt should easily be serviced by Patni’s earnings before interest, tax, depreciation and amortization of about $150 million (annualized for the first three quarters of 2010).
And as pointed out in this column before, small and midsize IT firms have been losing share to their larger peers at an increasing rate in the past few years. With the Patni acquisition, iGate’s size would jump by about 3.6 times to nearly $1 billion. This should help it compete with larger firms.
While all this sounds good on paper, it, of course, remains to be seen if iGate would be able to integrate the operations of a much larger firm with its own. This concern seems to be reflected in its share price.