By Geetanjali Kedia

Billion dollar Nasdaq-listed US-based iGATE Corporation has acquired 63.37% stake in India's seventh largest software exporter, Patni Computer Systems, for Rs. 4,179 crore, at Rs. 503.50 per share, valuing the company at Rs. 6,595 crore, or at a 7.6% premium to its current market cap of Rs. 6,130 crore.

The three Patni brothers, viz. Ashok Kumar, Gajendra Kumar and Narendra Kumar, who have been looking for a buyer for the tech firm for over 3-4 years now, will sell their 45.88% stake, while General Atlantic, which is invested since 2002, will sell its 17.49% stake (comprising of equity shares and ADS), which has gone beyond its investment timeline.

iGATE will make the mandatory 20% open offer to Patni shareholders at Rs. 503.50 per share, since no non-complete fees will be paid, as part of the deal. Total funding for this 83% stake would aggregate to Rs. 5,498 crore, making it one of the largest M&As in the Indian technology space in recent years.

iGATE, which has about $100 million (or Rs. 450-500 crore) in cash or cash equivalent (raised funds recently) and negligible debt on its balance sheet, as of 30-09-10, will seek funding from a consortium of banks Royal Bank of Canada, Jefferies & Co., Standard Chartered, Deutche Bank and PE partner Apax Partners. This strategic acquisition will bring in synergies for the acquirer, unlike PE firms Advent-Carlyle, who were also in foray for a buy-out.

A brief snapshot of the two companies is presented below:

Note: Exchange rate of 1$ = Rs. 45 is considered above.

The deal spells many positives for iGATE:

·         When small and midsize IT firms have been losing share to larger peers at an increasing rate in the past few years, iGATE's size would jump by about 3.5 times to over Rs. 4,500 crore or over a billion US dollars, which will help it compete with larger firms like TCS, Infosys and Wipro.

·         Besides the overall bigger size of Patni, which will not only let iGATE bid for larger deal, its clientele base will widen further and its risk of dependence on few clients will thereby reduce. As top 10 clients bring 84% of total revenues versus Patni's 48%, the acquirer will benefit from spread in business.

·         Patni's stronger manufacturing vertical will prove a good diversification form iGATE's present focus on BFSI.  About 30% of Patni's revenues come from the manufacturing vertical i.e. over Rs. 900 crore in sales, as against iGATE's mere Rs. 200-225 crore from the same segment.

·         iGATE is likely to be the business developer, with Patni will provide the execution support from the back. Both the companies have around 80% of revenues being generated from US, with Asia Pacific accounting for less than 10% of revenues. Thus, business integration and client retention, two key challenges for any successful M&A, and more so for IT industry, will be a lot easier.  

·         Besides management expertise, General Electric, being one of the biggest customers for both iGATE and Patni, will mean that the combined entity will gain immensely from synergies and eventual integration.

However, integration of a larger firm with itself may take longer for iGATE. Client retention will be another challenge, which will have to be carefully addressed, as top 5 clients of Patni approximately make up for iGATE's entire present business. Thus, in order to draw meaning from the acquisition, iGATE will have to nurture and growth all of Patni's clients, given no non-compete fees being forked out for Patni brothers.

A possible merger is likely in the future, which may amount to delisting of Patni from the Indian bourses and a subsequent reverse merger with the smaller iGATE. Alternatively, iGATE may decide to merge itself with the India-listed company. Probability of the latter, however, seems bleak.  

The deal has been done at a sales multiple of little over 2 times and PE multiple of around 12 times, based on trailing multiples. This seems to be beneficial for Patni shareholders, as well, as the business will now receive due management focus from the changed leadership.

All in all, a win-win deal for all, is finally a done one!