India Inc witnessed a large acquisition in the IT sector, after a long interval. iGate Corporation is acquiring Patni Computer Systems, in a deal which values the company at about $1.5 billion or Rs 6,800 crore. This is not a case of the big fish going for the smaller fish. Patni has a larger business than that of the acquirer. Phaneesh Murthy is the president and CEO of iGate, which is buying out the Patni’s family’s stake in the company.
The company will pay $921 million to acquire a 63% stake in Patni, including 45.6% from the current promoters of the company and the rest from private equity firm, General Atlantic (17.4%). iGate is acquiring these shares at Rs 503.5 a share, or It will also be required to make a mandatory 20% open offer under Sebi regulations, to Patni’s minority shareholders. If the offer is successful, its total acquisition cost will be about $1.2 billion.
iGate will fund the deal through a mix of debt and equity. It will raise debt of $700 million from Jefferies & Company and RBC Capital Markets. Apax Partners will also invest $270 million in the company, which will increase up to $480 million, depending on the response to the open offer.The open offer will close on March 23,2011.
Revenues of Patni exceed that of iGate. iGate’s revenues of $199.5 million for the nine months ended September 2010 is 40% less than that of Patni, the seventh largest IT services company. Despite Patni being a larger IT company, its valuation does not compare to IT mammoths such as TCS, Infosys and Wipro, who are valued at more than 20 times their Ebidta or earnings before interest, depreciation, tax and amortisation. Patni has been valued at 8 times its Ebidta, which is reasonable and factors in an improvement in its performance in the coming years.
Some key features and issues as a result of the acquisition:
- iGate’s revenues in the past 12 months were $262 million or about Rs 1,200 crore while Patni’s revenues in this period was $689 million or about Rs 3,100 crore. The combination makes a Rs 4,300 crore company or a billion dollar company, giving it the heft to bid for bigger contracts.
- Both companies have a comparable operating profit margin of about 19%, so there is no gain or loss on this front as a result of the acquisition.
- The increase in workforce to around 25,000 signifies the ability to take orders of a much larger scale. Prior to the deal, iGate had a staff strength of around 8,000 employees only.
- Specialization in niche areas of IT in addition to established verticals like manufacturing, enterprise software and supply chain management, would be possible.
- Since iGate is the acquirer but Patni is the larger entity, post-merger integration is very critical to this transaction and can take a long time. How the two groups of senior management reconcile their strategies will determine the future course of the entity.
- Possible change of and expansion of the client base would result depending on the depth of expertise in service lines. Top 10 clients are expected to generate 49% of revenues , indicating stability in business.
- Patni’s strength in retaining clients, and its long term relationships with top clients would have a positive rub-off on the combined entity. Its deeper expertise would result in a more innovation driven enterprise.
- Patni shareholders do not seem very enthused with the transaction. The share price of Patni has moved downwards by 4% to Rs 446 on January 11. The open offer of Rs 503.5 is not at a significant premium to the current market price. If the open offer is over-subscribed, then a partial acceptance will mean shares being returned to shareholders. That could explain the fall in its share price. But iGate has declared that it intends to keep Patni as a separately listed entity.
- iGate’s investors too are not very enthusiastic, with the share price falling by about 11% on Monday, at the Nasdaq, and was down by another 6% at 10.49pm EST on Tuesday. The company’s debt to equity ratio, after this transaction will be under 2 times.