iGate's acquisition of Patni a win-win for all

While iGate leaps into the $1-billion club, the combined entity will have a larger offering, better pricing power and scope to improve margins.

Nasdaq-listed software firm iGate's acquisition of Patni Computer Systems was received positively by the market. On a day when the Sensex was down 2.4 per cent, the Patni scrip closed 0.8 per cent higher at Rs 463.85.

While the two companies are yet to provide the finer details regarding the integration of their operations, etc, analysts believe there is room to gain for the duo, besides wide synergies.

More so, analysts indicate the deal's valuations appear fair, though below the Rs 525-550 a share expected earlier, and they believe Patni's shareholders stand to gain in the near term as well as the long run.

Says Rohit Kumar Anand of Pinc Research, "The deal is a fair value and is not bad from the shareholders' perspective. While the deal will enable iGate to achieve scale, it will aid top line growth for Patni, given iGate's aggressive approach towards bagging the deal. Major rerating in the Patni stock will happen now as growth accelerates. I don't think investors should participate in the open offer."

However, Jagannadham Thunuguntla, strategist and head of research, SMC Global, believes if the market provides an exit opportunity in the near term, investors should grab it.

"It is a fair deal for all the parties involved. If the market price reaches Rs 480-490 in the near term, investors with a shorter horizon can sell, else they can tender in the open offer," he says.

The deal

iGate along with private equity player Apax will acquire 63 per cent stake (46 per cent from Patni's promoters and 17 per cent from General Atlantic) in Patni Computer Systems in a deal worth up to $1.22 billion.

This includes the cost of the mandatory open offer for garnering 20 per cent more at a price of Rs 503.5 a share.

iGate has committed debt financing of $750 million for the acquisition, which will take its net debt to around two times the fully consolidated, adjusted Ebitda.

The combined entity's (iGate plus Patni) anticipated free cash flow generation would not only enable iGate to service the debt comfortably, but also reduce its net leverage levels going forward.

Further, Apax has committed equity financing between $270-480 million. Overall, the iGate management expects the deal to be accretive by 2012 on a cash earnings per share basis.

The deal is likely to be completed by June 2011 and Patni will be listed on the Indian bourses till its completion, post which the new promoters would look at a US listing of the company.

Synergies

In the IT industry, size matters. The Patni-iGate combined entity would have annual revenues close to $1 billion, enabling it to bid for large-scale deals.

The combined entity will also have better pricing power given the increased basket of offerings, even as their combined costs would remain largely unchanged.

The combined Ebitda for the last 12 months stood at around $215 million and cash and equivalents close to $450 million (including Patni's $318 million).

With Patni generating quarterly Ebitda of $38 million and iGate $17 million, expect the cash kitty to grow bigger over the coming quarters.

The business synergies, too, will be significant. While iGate's strength is in the banking and financial services domain, Patni has expertise in insurance, manufacturing, retail & distribution, communications, media & utilities verticals.

With just two common clients, one being a large revenue contributor (GE), the client overlap is negligible for both the companies. This will enable the tech companies to tap in significant cross-sell opportunities.

On the flip side, analysts believe retention of clients (of Patni) remains a key monitorable as Patni does not undertake critical work for its clients, making it easier for them to switch vendors.

At the broad level, they believe the integration of the two companies will take two to three quarters by the completion of the deal in around June 2011.

With both the managements speeding up employee interaction and holding workshops to address employee concerns about the deal, retaining the combined workforce of over 24,000 people should not be a significant issue.

The companies can also use tools like wage hikes to curb the high attrition rate. Also, a stronger employer brand will also mean more growth avenues for the employees.