Around last September, when senior partners at Apax got a call from Credit Suisse, advisors of the Patni family and General Atlantic, with a potential sale mandate, it was déjà vu time for Shashank Singh, Apax Partners’ co-head in India. Apax, the $15-billion global private equity fund specialising in media, technology and retail sector investments, had looked at Patni in 2007. It was then a different deal. Narendra Patni, the eldest of the three Patni brothers, was looking at a new financial partner or a private equity player to buy out his other two brothers, Gajendra and Ashok, and the existing financial sponsor, General Atlantic Partners. The deal got aborted.
But perseverance pays. Apax Partners can vouch for that. Four years later they are second-time lucky logging into the company with their strategic partner iGate.
For Patni, flirting with suitors as diverse as PE players to Indian and Japanese strategics, it’s a case of a deal finally been signed, sealed and delivered.
Call it coincidence or sheer opportunistic pursuit. A few months prior to that call around September, Apax and iGate’s CEO Phaneesh Murthy were exploring possible areas of partnership and scouting for targets in India and elsewhere. Of the five sectors that Apax focuses on worldwide, technology, media and telecom (TMT) figure quite prominently. As recent as last May, Apax entered Brazil by picking up a controlling interest in TIVIT, a leader in integrated IT and BPO services in Latin America. Murthy, too, has been looking at taking iGate to the billion-dollar bracket. A partnership, hence, seemed natural.
But Apax knew from the beginning that Patni was not a standalone PE transaction. Convincing Patni’s clients, workforce and may be even the promoters would have been difficult. PEs worldwide are not perceived kindly with many even comparing them to “locusts”, notorious for stripping assets in the many companies they have bought into.
Fortunately Murthy also got a call from Patni’s banker around the same time and it didn’t take long for the two to figure out it is much easier to partner and bid.
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In the end they were the last guys standing in what is today the largest PE-backed buyout deal in India. “In iGate, you get a very good management team that is under-leveraged. And the combination of iGate and Patni will give Apax a larger scale in one shot,” says Topsy Mathew, Managing Director, Mergers and Acquisitions (M&A) at Standard Chartered, Apax’s advisor in the deal.
In their thesis, Patni can be the next Cognizant. Despite lackluster growth since 2007, four CEOs in as many years, a somewhat dysfunctional board dynamics and a warring promoter group, Patni had managed to cling onto many of its clients.
With iGate, there is limited overlap with only two clients are common, GE being one. Both Patni and iGate have strong delivery systems.
If iGate is strong in BFSI, then Patni scores in insurance, manufacturing and product engineering. The only area where Patni needs a booster dose is account management and sales, the twin passions of Murthy. Or as a close associate says, “It’s his secret sauce.”
That’s where the value lies going forward. That’s the foundation of the turnaround strategy. That’s the “angle” private equity players talk about while charting upsides to their investments.
| THE PATNI STORY |
| * February 1978: Patni Computer Systems is founded |
| * 2003: Patni acquires US-based IT solutions company, The Reference Inc, for a cash consideration of $7.5 million |
| * Early 2004: Patni lists on bourses |
| * October 2004: Patni acquires Cymbal Corporation for $68 million |
| * 2006: Patni acquires US-based ZAiQ Technologies, a design and verification company |
| * Early 2007: Patni in discussions for stake sale to Apax Partners and the Texas Pacific Group |
| * July 2007: Patni acquires US-based Taratec Development Corp for $27.2 million |
| * July 2007: Patni acquires Logan-Orviss International, an independent specialist telecommunications consulting services company in Europe |
| * October 2007: Stake sale falls through over management issues and pricing mismatch |
| * 2009: General Atlantic, a stakeholder in the company, looks at exiting the firm. Talks fall apart on pricing issues |
| * October 2010: Patni starts discussions for stake sale with various parties; iGate-Apax and Caryle-Advent consortiums in fray |
| * December 2010: iGate-Apax emerges as frontrunner for buying majority stake in Patni |
| * January 2, 2011: Scheduled announcement of deal with iGate delayed over tax liability issues |
| * January 10, 2010: iGate-Apax buys 63 per cent stake in Patni Computer Systems for $921 million |
Weren’t they skeptical? Of course they were. Patni is a family drama they had seen before and it doesn’t, rather didn’t, end up well in the past. But with Narendra Patni and his son Anirudh taking a backseat in the company for the last few months, it was no rocket science to figure out the inevitable was close.
iGate-Apax partnership was instrumental from Day 1. From diligence to deal structuring and organising debt and negotiating terms, the efforts were mutual.
The joint exercise proved handy even while organising $700 million of debt from Jefferies and Royal Bank of Canada. The debt will be a bridge facility which will be refinanced via bonds giving considerable elbow room to iGate as it will not attract maintenance covenants.