Joining hands with PE major Apax, the Nasdaq-listed iGate finally seals a deal for Patni Computers to create a $1-billion entity
iGate today announced that it will acquire the combined 63 per cent stake held by three Patni brothers, promoters of India’s seventh-largest IT services firm, and private equity player General Atlantic for '503.5 a share. While the Patnis hold 43.6 per cent, GA holds 14.6 per cent.
iGate, backed by funding from Apax Partners, will pay about $921 million for the shares. It will also sell to Apax $270-million worth of preferred stock convertible into common stock. This may be later increased to $480 million, based on the response to an open offer.
With the 20 per cent open offer to Patni’s minority shareholders, the deal will involve a payout of $1.22 billion. The price of '503.50 a share is 9.4 per cent higher than Patni’s closing price on Friday.
| TOP IT M&As | |||
| Buyer | Target | Year | Value |
| iGate-Apax | Patni | 2,011 | $1.22 bn |
| HCL Tech | Axon | 2008 | $684 mn |
| Tech Mahindra | Satyam | 2009 | $667 mn |
| Wipro | Infocrossing | 2007 | $600 mn |
| TCS | Citi Global | 2008 | $505 mn |
| Firstsource | MedAssist | 2007 | $330 mn |
| WNS | Aviva BPO | 2008 | $228 mn |
Apax will have a 20-34 per cent stake in iGate, based on the investment finally made in the company. iGate will also raise about $700 million in debt from Jefferies & Company and RBC Capital Markets to fund the acquisition. Credit Suisse were advisors for the Patni promoters.
The acquisition brings to an end several years of uncertainty over the fate of Patni. Observers say Murthy pulling off the acquisition is almost a miracle -- not because iGate isn’t even half Patni’s size, but because he got the three Patni brothers to agree to sell their stake. Another important aspect was to keep the private equity consortia of Advent-Carlyle and Vivek Paul at bay.
In the process, Murthy has created a $1-billion entity, with a headcount of 24,834. “We believe this deal is extremely strategic. It gives us a much larger platform to play on; it allows us to bid for much larger deals, which hitherto were only available to larger players. It gives the combined company many more verticals to play on,” Murthy told reporters in Bangalore.
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Popular for his aggressive style of working right from his Infosys days, this is not the first time that Murthy tried to bag a company bigger than his own. In 2009, he along with Tech Mahindra, L&T and others vied for Satyam Computer Services.
A beaming Murthy today said he took the failed attempt as a part of a learning process.
“I never have regrets in life. We did the best that we could do at that time. We probably did not have the capability to pull off the transaction and I am just glad that we have matured in three years to have done it,” he said.
The challenge now at Patni, Murthy said, “Is to take a company, which is moving like an auto rickshaw, and convert it to the speed of a car. It’s a clean company, with relatively good margins,” he added.
iGATE will put $300 million into an escrow account for the open offer. Until the process is complete, iGate will have observer status on the board of Patni. After that, iGate will have two members on Patni’s board. The company said it plans to continue with Patni’s listing on Indian bourses until the “foreseeable future”.
“The two companies will remain listed for the time being because there are a lot of regulatory challenges in terms of merging them. There are a lot of complications, as these are two listed companies falling under two different jurisdictions,” added Sujit Sircar, CFO of iGate.
Both companies will continue to work as independent firms until the entire process of integration is over. “Nothing changes immediately,” said Jeya Kumar, CEO of Patni. According to the management, it will take at least 18-24 month for an end-structure to emerge. In the meantime, the management team of both the companies will be independent, as will be the board members.
Meanwhile, iGate has identified Deloitte and Mercer to help it in the integration process. According to the integration plan, the company will have a common leadership team from both companies. Efforts will be made to retain Patni employees and senior management team.
“We are known for our HR policy and are considered one of the best employers in the IT industry. We understand that employees are the real assets for any IT services company and hope to retain all of them,” added Murthy.
For Patni, which has revenues of $700 million and $312 million in cash, this will give it an entry into the banking, finance and insurance services and manufacturing segment. For iGate, the acquisition will allow it to have a wide array of offerings. “From a synergy point of view, I think both companies have a lot to look forward to. The product engineering space is a segment that both companies can leverage,” said Jeya Kumar.
Patni today has 282 active customers, with the top 10 contributing over 40 per cent to revenues. On the other hand, iGate, which reported revenues of $252 million in the accounting year ended September 30, 2010, employs 8,278 people. The company was debt-free until now.
iGate’s gross margin is close to 40, whereas Patni’s operating margin is about 36 per cent. The operating margin of the both companies are more or less the same, according to iGate.