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Investors need not wait till buy-back to exit Patni Computer

Investors need not wait till buy-back to exit Patni Computer

Nasdaq-listed iGate Corp., which owns 81% of Patni Computer Systems Ltd, had decided to buy out the latter’s remaining minority shareholders last November. It has finally got the required clearances and is ready with its buy-back offer. The buy-back price will be determined through a reverse book-building process, which will be conducted later this month. IGate has the option of rejecting this discovered price, if it feels shareholders are being too demanding.

Investors, however, seem to be betting it will be willing to pay much more to get Patni delisted from Indian exchanges. Patni shares have risen to 495 since iGate’s buy-back announcement. It must be noted here that iGate is already quite leveraged and it may be uncomfortable adding much more debt to its books. Besides, it had paid Patni’s erstwhile promoters 503.50 a share and may be unwilling to offer minority shareholders a higher price.

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IT firm iGate Corp has got approval to buy back the remaining shares of Patni Computer Systems. But can it afford a high-priced buyback? Mint’s Mobis Philipose discusses

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What’s more, at current prices, Patni trades at a rich valuation of over 15 times estimated earnings for the year till March 2013. Analysts have also expressed concern about the possibility that iGate may route new orders to the parent firm rather than to Patni, where it doesn’t have a 100% stake.

Also See | Delisting push (PDF)

According to Nomura Research, the Patni management indicated last year that for General Electric Co. (a client common to iGate and Patni), incremental revenue from all new projects would be booked under iGate. This possibility of value erosion is another reason for investors to exit. And selling a mid-tier information technology stock at 15 times one-year estimated earnings isn’t exactly a bargain sale. In fact, rather than be surprised if iGate rejects the discovered price, it makes sense for investors to sell their shares in the open market and avoid the long-term capital gains tax that’s applicable on off-market transactions.

Graphics by Yogesh Kumar/Mint

We welcome your comments at marktomarket@livemint.com


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