22 Dec 10 Wedding bells imminent for Patni

It looks like this time next week, we will all be in the know about the results of the latest round of Patni stake sale attempts. India’s sixth largest software services exporter will see the emergence of a new investor by the end of this week, if reports are to be believed…What does this mean for the company, and by extension, for the outsourcing industry as a whole?

Three contenders wooing the bride
As much as 62% of Patni Computer shareholding is up for sale, composed of 16% holding by PE fund General Atlantic, and 46% stake with the three Patni brothers led by Narendra Patni. The shares are being valued close to market price, approximately between Rs.500-525, against Rs.482.50 on BSE last Friday.

The three bidders eyeing Patni stake are:

  •  A private equity consortium including the Carlyle Group and Advent International, in partnership with Vivek Paul (ex-Wipro vice-chairman)
  •   Phaneesh Murthy, CEO of software services firm iGate, backed by PE Apax Partners
  •  At the time of writing, IT products and services firm Fujitsu is also known to have made a bid

According to news sources, iGate is the frontrunner in the bid for Patni. It is also believed that if the bids made are similar, the promoters will lean towards an investor with an IT background. iGate does look like the likely winner, as the company has apparently just made the highest bid, and also has IT expertise – what more could Patni ask for, right?

Even so, how does this marriage make strategic sense?
Patni and iGate share GE (the financial services conglomerate) as one of their largest customers, bringing the companies $65m and $50m in annual revenues respectively. If the two companies were to merge, it would catapult them to join the mighty league of the $1b tech companies, and elicit a workforce of ~34,000.

iGate has looked to build scale for a few years now, and organic growth has definitely been a challenge. Earlier last year, the company had aggressively bid for a controlling stake in Satyam Computers, before Tech Mahindra stepped in. A reverse merger with Patni now will give iGate extended servicing capabilities and stronger branding.

The Patni promoters have unsuccessfully tried to sell their stake multiple times in the past. Due to over-valuated asking prices and an inopportune business environment, they have been unable to exit gracefully, until now. A merger with iGate will bring fresh management perspective to a company that needs strong strategic direction to survive in the long term.

In terms of services, Patni stands to benefit from iGate’s focus on consulting (ITMA, business process, and shared services consulting), and experience with business outcome based commercial models. In turn, Patni has a knowledge services (KPO) extension to add to the joint portfolio. There are also strong synergies between the verticals targeted by the two companies.

Is this a shotgun wedding? What can go awry?
It is interesting to note that Patni has a few unusual conditions for its bidders. Narendra Patni has refused to sign a non-compete clause, allowing the brothers to target the IT industry immediately through another business endeavour (if they so wish). The promoters are noncommittal about client poaching terms, further driving speculation about their future plans.

We must also consider the brand dynamics of the merged Patni-iGate entity. The Patni brand is certainly bigger than iGate, with a stronger value in terms of recognition and recall. However, a new name and raison d’etre might be the gel that binds the two companies, as it jointly competes with IT giants such as Infosys and TCS.

More such mergers and acquisitions next year?
As we shared on the Horses for Sources analyst blog, we expect the wave of IT-BPO M&As to continue in the next financial year. As the outsourcing industry matures, vendor consolidation is a given. What stands out, and Patni-iGate is a perfect example, is the aggressive pace with which the acquisitions are taking place. iGate, in this case, is most likely looking to scale up through this merger. Reasons for other providers include extending business reach and the overall range of services offered to the global marketplace. As outsourcing picks up steam again, and client organizations cautiously loosen purse strings, the reasoning is that vendors such as Patni-iGate (and several others on the M&A spree) will be better positioned to address the demand. We then believe, let the match-making continue…!

ValueNotes Research
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