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January 10, 2011, 8:51 PM EST
By Ketaki Gokhale and George Smith Alexander
Jan. 11 (Bloomberg) -- IGate Corp.’s $1.22 billion offer to buy larger Indian rival Patni Computer Systems Ltd. is fueling concern the company is expanding beyond its means.
IGate tumbled 11 percent in U.S. trading after the Fremont, California-based company said yesterday it may take on as much as $700 million in debt and sell as many as 10 million new shares to fund the purchase up to 84 percent of the company. The 503.50 rupees-a-share offer was 9.4 percent higher than Patni’s closing price on Jan. 7 and led Noble Financial Group Inc. to cut its investment rating on IGate to hold from buy.
The purchase may exceed the $1.06 billion Oracle Corp. paid for control of I-Flex Solutions Ltd. in 2006 as the biggest acquisition of an Indian technology company, according to data compiled by Bloomberg. Buying Patni would help IGate triple sales and add more than 15,000 workers in the world’s largest technology-outsourcing country as companies worldwide resume spending on computers and technology services.
“It’s like a snake swallowing a buffalo, and it’s probably going to take quite some time to digest, probably months, and it will be lying there flat for quite some time,” said Nitin Padmanabhan, an analyst at Indiabulls Securities Ltd. in Mumbai. “We’re not too positive on this development.”
Backed by funding from Apax Partners LLP, IGate will pay about $921 million to buy 63 percent of Mumbai-based Patni from the founding family and General Atlantic LLC, followed by an open offer to acquire a 21 percent stake for about $301 million, IGate said in a statement yesterday.
‘Get Bigger, Sooner’
IGate’s offer values Patni at 11.8 times the Indian company’s earnings, lower than the 32.4 median multiple of seven comparable deals, according to Bloomberg analytics.
“One thesis for the whole industry is that if you don’t get bigger, sooner, you’re going to get smaller, faster,” Jeya Kumar, chief executive officer of Patni, said on a conference call with reporters yesterday. “Being a billion-dollar company puts you into a space you’ve never played in before. You get to bid on larger deals.”
After the acquisition, IGate will have 200 “million- dollar” clients, two clients with contracts of $15 million and above, and 36 clients with contracts of $5 million and above, Chief Executive Officer Phaneesh Murthy said in a call with reporters.
“This is an extremely strong and well diversified client mix for the combined companies,” Murthy said. “All of them will respect the fact that the transaction has given them significant benefits because it’s given them access to better service offerings.”
‘Excellent Investment’
General Atlantic, an investor in Patni since 2002, has been “pleased to participate in the growth and success of this highly regarded company which has been an excellent investment for us and our investors,” spokeswoman Pat Hedley said in an e- mail.
IGate will need to “cherry pick” industries in which it plans to develop expertise and devise systems to deliver services to clients within the next fifteen months, Jan Erik Aase, a principal analyst at Forrester Research Inc., said in a research note Jan. 10.
“Their clients will begin to evaluate other options if they are not able to address these in the said timeframe,” Aase wrote.
Addressing employee departures at Patni needs to be IGate’s top priority, according to Aase.
Employee Retention
“You look at every level of management at Patni, and they’ve handled a much larger volume of business than anybody at IGate has,” said Padmanabhan of Indiabulls. “For IGate to come on board and start leading the company would be a little difficult because people at Patni may not take it in the best way. You’ll probably see a spike in attrition.”
Patni prepares customized software and maintains computer systems for 280 customers in 38 countries and was founded in 1978. The seven founders of Infosys Technologies Ltd., India’s second-largest software exporter, worked at Patni Computer before starting their own company in 1981.
Viscaria Ltd., backed by Apax, will buy $270 million of securities convertible into IGate shares at $20.30 apiece, according to yesterday’s statement. It may invest an additional $210 million depending on the success of the open offer and if IGate avoids a public share sale, according to the statement.
IGate has secured as much as $700 million in debt commitments from Jefferies Group Inc. and RBC Capital Markets, according to the statement. IGate hired Jefferies as its financial adviser for the Patni acquisition. Apax was advised by Standard Chartered Plc, said Topsy Mathew, managing director of mergers & acquisitions at the bank’s Indian unit.
‘Force to Reckon’
Credit Suisse Group AG and Ambit Capital Pvt. advised the Patni family, Patni’s Kumar said.
Patni Computer rose 0.8 percent to 464.10 rupees in Mumbai yesterday.
The deal will make IGate a force to reckon with, said IGate’s Murthy. The transaction is expected to be completed in the first half of this year, according to the IGate statement.
“We hope this will be an industry-changing transaction,” he said. “We’re creating a billion-dollar enterprise with 25,000 plus employees.”
The agreement comes amid a recovery in technology investments held back by the global recession. Worldwide spending by businesses and governments, including on computer equipment and software, will grow 7 percent this year to $1.6 trillion, after falling by 8.6 percent last year, according to an Oct. 15 report from Forrester Research.
Vying With Carlyle
In the U.S., the biggest source of revenue for Indian code writers, businesses and government will spend an estimated $889 billion on IT products and services next year, according to a Dec. 14 report from the Cambridge, Massachusetts-based researcher. Spending in the country will outpace gross domestic product growth as companies make up for orders delayed during the recession, Forrester said.
IGate and Apax had been vying with Washington-based Carlyle Group, the world’s second-largest private-equity firm, for control of Patni, five people with direct knowledge of the transaction said in December.
Private equity firms have poured $6.5 billion into the South Asian nation this year, more than twice the $2.5 billion they invested in the same period a year earlier, according to an Oct. 4 statement from Venture Intelligence, a Chennai, south India-based research company.
Buyout deals in the quarter ended Sept. 30 rose to $2 billion from $976 million in the same period last year.
--Editors: Abhay Singh, Young-Sam Cho
To contact the reporters on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net; George Smith Alexander in Mumbai at galexander11@bloomberg.net
To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net
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Jan. 11 (Bloomberg) -- IGate Corp.’s $1.22 billion offer to buy larger Indian rival Patni Computer Systems Ltd. is fueling concern the company is expanding beyond its means.
IGate tumbled 11 percent in U.S. trading after the Fremont, California-based company said yesterday it may take on as much as $700 million in debt and sell as many as 10 million new shares to fund the purchase up to 84 percent of the company. The 503.50 rupees-a-share offer was 9.4 percent higher than Patni’s closing price on Jan. 7 and led Noble Financial Group Inc. to cut its investment rating on IGate to hold from buy.
The purchase may exceed the $1.06 billion Oracle Corp. paid for control of I-Flex Solutions Ltd. in 2006 as the biggest acquisition of an Indian technology company, according to data compiled by Bloomberg. Buying Patni would help IGate triple sales and add more than 15,000 workers in the world’s largest technology-outsourcing country as companies worldwide resume spending on computers and technology services.
“It’s like a snake swallowing a buffalo, and it’s probably going to take quite some time to digest, probably months, and it will be lying there flat for quite some time,” said Nitin Padmanabhan, an analyst at Indiabulls Securities Ltd. in Mumbai. “We’re not too positive on this development.”
Backed by funding from Apax Partners LLP, IGate will pay about $921 million to buy 63 percent of Mumbai-based Patni from the founding family and General Atlantic LLC, followed by an open offer to acquire a 21 percent stake for about $301 million, IGate said in a statement yesterday.
‘Get Bigger, Sooner’
IGate’s offer values Patni at 11.8 times the Indian company’s earnings, lower than the 32.4 median multiple of seven comparable deals, according to Bloomberg analytics.
“One thesis for the whole industry is that if you don’t get bigger, sooner, you’re going to get smaller, faster,” Jeya Kumar, chief executive officer of Patni, said on a conference call with reporters yesterday. “Being a billion-dollar company puts you into a space you’ve never played in before. You get to bid on larger deals.”
After the acquisition, IGate will have 200 “million- dollar” clients, two clients with contracts of $15 million and above, and 36 clients with contracts of $5 million and above, Chief Executive Officer Phaneesh Murthy said in a call with reporters.
“This is an extremely strong and well diversified client mix for the combined companies,” Murthy said. “All of them will respect the fact that the transaction has given them significant benefits because it’s given them access to better service offerings.”
‘Excellent Investment’
General Atlantic, an investor in Patni since 2002, has been “pleased to participate in the growth and success of this highly regarded company which has been an excellent investment for us and our investors,” spokeswoman Pat Hedley said in an e- mail.
IGate will need to “cherry pick” industries in which it plans to develop expertise and devise systems to deliver services to clients within the next fifteen months, Jan Erik Aase, a principal analyst at Forrester Research Inc., said in a research note Jan. 10.
“Their clients will begin to evaluate other options if they are not able to address these in the said timeframe,” Aase wrote.
Addressing employee departures at Patni needs to be IGate’s top priority, according to Aase.
Employee Retention
“You look at every level of management at Patni, and they’ve handled a much larger volume of business than anybody at IGate has,” said Padmanabhan of Indiabulls. “For IGate to come on board and start leading the company would be a little difficult because people at Patni may not take it in the best way. You’ll probably see a spike in attrition.”
Patni prepares customized software and maintains computer systems for 280 customers in 38 countries and was founded in 1978. The seven founders of Infosys Technologies Ltd., India’s second-largest software exporter, worked at Patni Computer before starting their own company in 1981.
Viscaria Ltd., backed by Apax, will buy $270 million of securities convertible into IGate shares at $20.30 apiece, according to yesterday’s statement. It may invest an additional $210 million depending on the success of the open offer and if IGate avoids a public share sale, according to the statement.
IGate has secured as much as $700 million in debt commitments from Jefferies Group Inc. and RBC Capital Markets, according to the statement. IGate hired Jefferies as its financial adviser for the Patni acquisition. Apax was advised by Standard Chartered Plc, said Topsy Mathew, managing director of mergers & acquisitions at the bank’s Indian unit.
‘Force to Reckon’
Credit Suisse Group AG and Ambit Capital Pvt. advised the Patni family, Patni’s Kumar said.
Patni Computer rose 0.8 percent to 464.10 rupees in Mumbai yesterday.
The deal will make IGate a force to reckon with, said IGate’s Murthy. The transaction is expected to be completed in the first half of this year, according to the IGate statement.
“We hope this will be an industry-changing transaction,” he said. “We’re creating a billion-dollar enterprise with 25,000 plus employees.”
The agreement comes amid a recovery in technology investments held back by the global recession. Worldwide spending by businesses and governments, including on computer equipment and software, will grow 7 percent this year to $1.6 trillion, after falling by 8.6 percent last year, according to an Oct. 15 report from Forrester Research.
Vying With Carlyle
In the U.S., the biggest source of revenue for Indian code writers, businesses and government will spend an estimated $889 billion on IT products and services next year, according to a Dec. 14 report from the Cambridge, Massachusetts-based researcher. Spending in the country will outpace gross domestic product growth as companies make up for orders delayed during the recession, Forrester said.
IGate and Apax had been vying with Washington-based Carlyle Group, the world’s second-largest private-equity firm, for control of Patni, five people with direct knowledge of the transaction said in December.
Private equity firms have poured $6.5 billion into the South Asian nation this year, more than twice the $2.5 billion they invested in the same period a year earlier, according to an Oct. 4 statement from Venture Intelligence, a Chennai, south India-based research company.
Buyout deals in the quarter ended Sept. 30 rose to $2 billion from $976 million in the same period last year.
--Editors: Abhay Singh, Young-Sam Cho
To contact the reporters on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net; George Smith Alexander in Mumbai at galexander11@bloomberg.net
To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net
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