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The Acquisition of Patni Computer Systems Limited

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The Acquisition of Patni Computer Systems Limited AJF Volume 1 Issue 1 2016 Amity Journal of Finance 1(1), (176-186) ©2016 ADMAA The Acquisition of Patni Computer Systems Limited Puneet Dublish Jaipuria Institute of Management, Noida, India (Received 23/06/2015 ; Accepted: 04/07/2016) Abstract The case study ‘The Acquisition of Patni Computer Systems Limited’ analyzes the acquisition of Patni Computers, India’s sixth largest business solution provider and IT services company on January 10, 2011 by iGate Corporation, an IT-ITES listed on NASDAQ. This acquisition was the second largest in terms of deal value which stood at US$ 1.2 billion. The deal in this sector was unique as iGATE acquired Patni which was more than double its size and had to take a debt of US$ 700 million to finance this acquisition. To make the acquisition successful, the iGATE management has to overcome several challenges. This case has been written from information available in the public domain mostly from the Economic Times and others as mentioned under references, for class room discussion to highlight various aspects of mergers and acquisitions like regulatory, valuation and financing, takeover, delisting, sources of value creation/synergy and post-acquisition integration. Further through this case a student will be required to explore the valuation deal (overvalued or undervalued) and post-acquisition integration performance. Keywords: Valuation, Financing, Delisting, Synergy, Post-Acquisition JEL Classification: M00, M1 Paper Classification: Case Study Introduction The year 2010 could have broken the record $69.4 billion M&As deal done in 2007 – when Tata Steel bought the Anglo-Dutch Corus Group – had few $billion plus deal as anticipated taken place during that year. iGate-Patni Computer was among such few deals. However after negotiations and sustained media speculation for several weeks, on January 10, 2011, the acquisition of up to 83 per cent stake in Mumbai-based IT services and business solutions - Patni Computer Systems Ltd. by NASDAQ listed iGate Corp was announced. The deal, valued at $1.22 billion, makes this one of the largest acquisition in the technology sector in India, the largest being the acquisition of a controlling stake by Oracle Corporations in i-Flex solutions at a value of $1.5 billion in the year 2005. The deal in true David Vs Goliath style saw iGate headed by CEO Phaneesh Murthy, originally the founder of Infosys - N R Narayana Murthy protégé, acquiring a company three times the size of iGate in terms of annual revenues. The acquisition of $690 million Patni by $250 million iGate created an entity with a combined value of about a billion dollars and a force to reckon within the technology outsourcing industry. 176 ADMAA Amity Journal of Finance Volume 1 Issue 1 2016 AJF Phaneesh Murthy, in his interview published in TOI dated January 11, 2011, to a question replied that it was quite challenging to convince the shareholders about the synergy and gains, raise funds at an affordable cost, negotiate the deal with family promoters and handle queries from the media and analyst community. Through its consortium, Pan-Asia iGate Solutions, iGate, initially acquired the 45.6% stake of the three Patni Brothers – Narendra, Ashok & Gajendra. It also acquired General Atlantic’s 17.4% stake, followed by 20% from public shareholders at the same price of Rs.503.5 a share through the mandatory open offer on April 27, 2011. Theoretical Framework Corporate restructuring has become an unavoidable process for the companies across globe. Mergers, amalgamations, divestitures and so on, referred to collectively as corporate restructuring, are important strategic tool adopted by companies to grow and remain in the business. Acquisition is a broad term and includes all forms of mergers viz. horizontal, market extension, product extension and vertical merger. Research has shown that the majority of mergers were taken to derive the benefits of economies of scale, increase market share, achieve efficient utilisation of resources and develop new resources and capabilities. Daimler-Benz and Chrysler, Lipton India and Brooke Bond, ICICI Bank and Bank of Madura are some of the examples of horizontal mergers. The iGate acquisition of Patni Computers and later its merger with itself is among the largest horizontal merger in Indian IT sector. Information Technology Background and Road Ahead India’s IT sector is the world’s biggest sourcing destination, accounting for approximately 52% of the US$124 – 130 billion market. The Indian IT industry is highly export oriented and it stands fourth in India’s total FDI share and accounts for approximately 37% of total private equity and ventures in the country. The USP of Indian IT sector is its cost competiveness in providing IT services in the global sourcing market, at a cost that is 3-4 times cheaper than the west. The Indian BPOs (ITES) are moving up the value chain. Apart from being cheaper, the Indian IT industry, over the years has also moved up the value chain and has been handling high end data for even financial service sector like insurance, banking and mortgage companies, airline information, enterprise resource planning among others and higher value added segments such as product design, development and support, mission critical applications, HR management, knowledge process outsourcing and large complex projects. The share of the IT sector in India’s GDP growth rose to approximately 8% in FY 2014. The revenue stream to IT industry comes from Business Process Management (BPM), IT services, software products and engineering services and hardware. The export of IT services accounts for more than half of total IT exports excluding hardware at 57.9% (See Figure 1). 177 Amity Journal of Finance ADMAA AJF Volume 1 Issue 1 2016 Source: NASSCOM 2014 Figure 1. Share of IT Products In a report title ‘The SMAC Code – Embracing New Technologies for Future Business’, CII estimates that the IT-BPM sector in India will expand at a CAGR of 9.5%to US$225 billion by 2020. For the IT-BPM industry, BFSI (Banking, Financial Services and Insurance) is a key business vertical, accounting for 41 per cent of total IT-BPM exports from India at a value of US$36 billion in FY 2014. The four sectors – BFSI, manufacturing, telecom and retail together accounts for approximately 85% of total IT-BPM exports from India (See Figure 2). Source: NASSCOM 2014 (BFSI = Banking, Financial Services, Insurance. T&M = Telecom & Media. T&T = Travel & Tourism. C&U = Construction & Utilities) Figure 2. Share of Products under IT-BPM Globalization has resulted in Indian IT industry capturing a sizeable share of the global market becoming the leader in providing technology outsourcing and business services. In the past verticals like insurance, banking, finance, telecommunication, manufacturing have been the growth drivers of the Indian IT industry. But off late, newer verticals like mobile applications, health care, climate change, energy efficiency and sustainable energy will boost the growth. As technology is playing a major role in business, traditional business houses and SMEs are using IT application and services. The software exports recorded a growth of 11.36% touching $88 billion in 2013-14. NASSCOM has made a forecast for software exports estimating a 13-15% increase during fiscal year through 2015 projecting a rise to as much as $98 billion in 2014-15 from about $88 billion in 2013-14 (See Table 1). However, it has lowered the growth range to 12-14% for 2015-16. 178 ADMAA Amity Journal of Finance Volume 1 Issue 1 2016 AJF Table 1: India IT-BPM revenues Revenues ($ billions) FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15E Domestic 22 20 24 29 32 32 42 48 Export 41 47 50 59 69 76 88 98 Total 63 67 74 88 101 108 130 146 Source: NASSCOM iGATE Corporation iGate is the brand name of IGATE Corporation and its subsidiaries and is a mid-cap IT firm listed on NASDAQ and has its headquarter in Fremont, Caifornia, USA. Its flagship company iGate Global Solutions, founded by Sunil Wadhwani and Ashok Trivedi, is based in Bangalore, India. The company offers applications development and maintenance, business interchange intelligence, ERP, data warehousing and BPO services. At the time of acquisition it was the first Business Outcomes driven integrated Technology and Operations (iTOPS) solutions provider with a global delivery model. Amongst its customers include companies in insurance & healthcare; life sciences; banking & financial services; manufacturing, media, entertainment, communication, retail, distribution & logistics, energy & utilities, leisure & travel and independent software vendors across the Europe- Middle East-Africa (EMEA), Americas and Asia-Pacific. As of December 31, 2013, the employee strength of the firm stood at 29,733 employees with an addition of 1,450. During the year ended December 31, 2013, the revenue increased by 7.17% to $1.1509 billion, however the net income increased by 35.5% from $95.8 million to $129.8 million. The diluted earnings per share were$1.21 as compared to $0.85 for the year ended December 31, 2012. Tables 2 and 3 present iGATE Corporation income statement and balance sheet. Table 2: Consolidated Income Statement of iGATE Corp.(Amount in thousands) Year Ended December 31 2013 ($) 2012 ($) 2011 ($) Revenues 1,150,925 1,073,930 779,646 Cost of revenues (a) 698,232 649,910 483,504 Gross margin 452,693 424,120 296,142 Selling, general & administrative expenses 190,261 171,471 151,497 Depreciation & amortization 35,189 46,382 38,735 Income from operations 227,243
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