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Submitted By:
103 Vishal Sukhija
108 Neha Suri
Prologue
The Indian mergers and acquisitions (M&A) market especially
in the IT industry, has been upbeat about the acquisition of
majority stake in Patni Computer Systems Limited (Patni) by
iGATE Global Solutions Limited (iGate) and its affiliates (the
Deal). It is no normal feat for iGate to acquire a company that
is 2.5 times its size. Rarely does such a role reversal happen in
the Indian M&A landscape.
With the announcement of the Deal, the year had clearly begun
on a positive note for the Indian M&A market. It is evident that
the glittering M&A trends in 2010 have continued in the first half
of 2011 too. Though the market dipped slightly in the second and
third quarters of 2011, the number and value of M&A deals
remained comparable to the corresponding periods in 2010.
In this M&A Lab, we make a deeper probe into the Patni - iGate
deal, a billion dollar transaction which elevates the combined
entity to the coveted league of billion-dollar Indian IT companies,
in terms of revenues. As always, we seek to analyze the legal,
regulatory, tax, financing and few other commercial dimensions
of this Deal.
Executive summary
iGate Corp is the ultimate parent company of all iGate group companies. It was
incorporated on November 12, 1996 under the laws of the Commonwealth of
Pennsylvania. Mr. Sunil Wadhwani and Mr. Ashok Trivedi are the founder
shareholders of iGate Corp.24
Pan-Asia is an unlisted company incorporated on December 17, 2010, under the laws of
the Republic of Mauritius. iGate Corp indirectly owns 100% of the equity share capital
of Pan-Asia. iGate Corp and its affiliates have agreed to provide funding to Pan-Asia
for the purposes of acquisition of shares and ADS held by the Promoters and GA in
Patni and in connection with the mandatory open offer.26
Pan-Asia has been set up by iGate Corp to act as a platform for the global strategic
expansion in the IT space, and make certain strategic investments, principally in the
Asian and in time African and Middle Eastern regions, on an opportunistic basis. As on
January 11, 2011, Pan-Asia had not made any investment nor commenced any business
activity.27
iGATE Global Solutions Limited (iGate)
iGate was incorporated on December 27, 1993 under the Companies Act, 1956
(Companies Act). iGate Corp indirectly owns 100% of the equity share capital of
iGate. As on January 11, 2011, 75.21% of the total issued and paid up equity share
capital of iGate is held by iGATE Inc. and 24.79% of the total issued and paid up
equity share capital of the company was held by iGate Corp. The service offerings of
iGate include, software development, outsourcing and related activities. The shares of
iGate are not listed on any stock exchange.28
Patni was incorporated on February 10, 1978 under the Companies Act. The shares of
Patni got listed on BSE and NSE on February 25, 2004. As of January 7, 2011, the total
paid-up equity share capital of Patni was INR 26,33,02,660 consisting of 13,16,51,330
equity shares of face value of INR 2 each. There are no partly paid-up shares issued by
Patni. Patni and its subsidiaries are engaged in IT consulting, software development
and Business Process Outsourcing ("BPO"). Patni has over 16,000 employees and 30
international offices across the Americas, Europe and Asia-Pacific and 22 global
delivery centers across the world. The equity shares of the company are listed on the
BSE and the NSE. The ADS of Patni are listed on the New York Stock Exchange
("NYSE")
About iGATE:
iGATE is the first Business Outcomes driven integrated Technology and Operations (iTOPS) solutions
provider with a global delivery model. iGATE's unique business model aligns with the client's strategic
objectives to achieve operational efficiencies, increase cost variability and rationalize their current operating
environment. With industry expertise spanning decades, iGATE has developed the right solutions with its
Business Outcomes driven approach for industry verticals - Banking, Insurance, Manufacturing, Retail,
Health Care, Media & Entertainment and Telecom & Hi-Tech.
About Patni:
Patni is a global provider of IT services and business solutions, servicing Global 2000 clients. Patni services
its clients through its micro-vertical focus in banking, financial services (BFS) and insurance (I);
manufacturing, retail and distribution (MRD); life sciences; communications, media and utilities (CMU).
Patni's service offerings include application development and maintenance, enterprise software & systems
integration services, business and technology consulting, product engineering services, infrastructure
management services, customer interaction services & business process outsourcing, quality assurance and
engineering services.
Analysis of Igate
iGATE had 8,278 employees, 82 customers, seven global delivery centers, and offices in 16 countries, with
revenues of $252 million for the 12 months ended September 30, 2010 and offered services for industry
verticals - Banking, Insurance, Manufacturing, Retail, Health Care, Media & Entertainment and Telecom &
Hi-Tech.
With companies such as Mphasis, HCL, Infosys and TCS all crossing $1 bn mark and having a strong
position in IT industry iGate was lagging behind with $252 million of revenue. So On January 10, 2011,
iGATE Corporation announced the signing of a definitive agreement to acquire up to 83% stake in Patni
Computer Systems Ltd. at a transaction value of US$1.22 billion.The acquisition helped the combined
iGATE-Patni entity get within threshold of US$1 billion in revenues as iGate with an annual revenue of
around $300 million will took over $ 700 million Patni which is more than double of its size.
Transaction
iGATE's subsidiaries signed definitive agreements with the three founders of Patni Computer Systems, viz.,
Mr. Narendra Patni, Mr. Gajendra Patni and Mr. Ashok Patni, and private equity firm General Atlantic, to
acquire their 45.6% and 17.4% stakes, respectively, at a price of Rs.503.5 per share, amounting to a total
consideration of approximately $921 million.
The closing of the acquisition was subject to customary conditions, including receipt of required regulatory
approvals, and the completion of the open offer for the purchase of shares of the public shareholders of
Patni. Patni Computer Systems had 16,556 employees, 282 customers, 22 global delivery centers, and
offices in 30 locations worldwide, and reported revenues of $689 million for the 12 months ended
September 30, 2010.
iGATE's advisors included: Jefferies & Company, Inc., financial advisors, Kirkland & Ellis LLP,
international legal counsel, Khaitan & Co, Indian legal counsel, Kotak Mahindra Capital Company Limited,
Managers for the Open Offer, and Ernst and Young, tax advisors.
Deal Structure
Strategic Fit
Strategic integration of resources
At the time of consummation of the Deal, Patni had 16,556 employees and 282
customers who were integrated with the 8,278 employees and 82 customers of iGate.37
Also, iGates 7 delivery centres and offices in 16 countries now work in tandem with
Patnis 22 global delivery centres and 30 offices around the world.38
The combined entity of iGate-Patni has the capability to serve companies across
verticals, including banking and financial services, insurance, manufacturing, retail,
and media and entertainment. When a company does not have the width of verticals,
then it normally gets restricted in terms of growth. Hence, Patni was unable to take on
bigger deals or huge orders. With this Deal, there is now scope for cross selling and
improvement in margins.
While the combined strengths of the entities has given a boost to the business and
market proliferation of iGate, it would also help the customers get better service, access
to more service lines and deeper pools of expertise.
Combined company will have a strong presence across several verticals including
banking & financial services, insurance, manufacturing & retail, communication &
media, and utilities.
2. An expanded pool of talent, diverse expertise across multiple verticals, higher level strategic end-toend service offerings and an established management team with a track record of proven execution
are expected to strengthen iGATE's competitive position as a top-tier player in the highly-fragmented
global IT industry.
3. The combination will create a compelling go-to-market strategy with iGATE's differentiated iTOPS
and outcomes-based business model augmented by Patni's delivery expertise and focus on microverticals.
4. Sustained growth in this segment lies in the ability to create a differentiated market focus that
extends beyond the previous generalist approach adopted by most Indian service providers.
Highlights:
Combined company will be a key player across several verticals including Banking & Financial
Services, Insurance, Manufacturing, Retail, and Media & Entertainment
companies is forecast at around 10-15%. Consolidation is the way forward for small and mid-sized companies to move up the value
chain and stay in business.
smaller clients will likely see the introduction of the companys iTOPS model for outcome
based pricing. At the heart of iTOPS is iGATE Patnis willingness to make investments in
parallel with clients in order to produce continuous improvements. Many clients need
additional time to transform their services to enable output based pricing, and iGATE Patni
often invests along with its clients. These investments involve both process and technology
and result in a business platform for the client.
The services industry will likely reflect positively on the announcement and the continued
integration of the two companies for the following reason: continued success would highlight
that mid-tier providers not only the global majors - can integrate their acquisitions to bring
new capabilities and scale to a broader brand name. Other mid-tier provides will leverage the
iGATE Patni model as a precedent to qualify and build acquisition and integration plans. Most
importantly, if the industry sees even a small uptick in consolidation stemming from this
acquisition, then buyers will have a greater number of qualified global services provider to
choose from.
Risks associated
Obviously there are always risks in any type of acquisition and there are actions that Patni clients can take:
Patni employee attrition risk Current Patni clients should assure their account management and
delivery teams that they have no intention of switching their current Patni engagements to a new vendor due to
the acquisition. Our research has shown a direct correlation between the level of client engagement and
branding that is done with the delivery teams and the attrition rate. We have seen attrition rates in the 6% to 8%
range when this is done correctly. Current Patni employees are more likely to remain at Patni if they see their
existing clients staying in place. Clients should seek confirmation, from Patni and iGate, of their intentions to
keep existing teams in place. They should also request an overview of any additional industry or technology
specific expertise that iGate will bring to each engagement.
Industry verticals could receive less attention Clients of both Patni and iGate should become
familiar with the various industry verticals currently covered by both companies. Verticals that are in common will
gain the advantages of the synergy between the two companies. Often acquisitions of this type are made to also
broaden a vendors footprint across additional industry verticals. Clients should request meetings with the
vendor senior management as soon as is practical to understand their intentions for the each of their industry
verticals.
Disruption Clients should identify the best practices they find valuable to the vendor senior management
teams so as to ensure they remain intact. They should encourage iGate and Patni to avoid the desire to make
every account management process and client-facing procedure consistent overnight. Careful study of all best
practices will help them leverage the synergy that can be created when bringing two successful companies
together.
Loss of brand recognition Clients should encourage iGate and Patni to brand the new entity in a
manner which best articulates the combined strength of the two companies. Since iGate is a much smaller
company, both clients and employees will be anxious to know the name that will be on their buildings, T-shirts,
and paychecks.
It is important for iGate and Patni to create their new "go-to-market" strategy in the next 60-90 days. 2011 will be
a critical transition for many clients as they look to their vendors to participate in more mission critical initiatives
and drive more value. If they aren't confident of the role this new combined entity can play, they might look to
other vendors to fill their needs.
it was critical that they establish the right metrics to underpin the solutions business as soon as
possible.
5.
Although iGate had a solutions development framework, post-acquisition of Patni it was by far
enhanced and improved with what Patni team was able to complement. This enhanced framework had
two major components the first part focused on defining the new solutions offering, and the
associated investments, and the second part dealt with the steps required to develop and take the
solution to market.
The new Integrated Solutions Development Framework (ISDF) had the full involvement and support of
both companies, and leveraged the strengths and experience that both parties brought to the new,
larger company. In fact, primary justification for the acquisition was that the two companies were
highly complementary in their competencies and skill sets. Patni had excellent technical capabilities
and strong micro-domain knowledge the understanding of sub-segments within a vertical and iGate
had a professional staff of process, domain and operational consultants.
The ISDF was based upon a standard product development Stage-Gate process, In fact, each of the
solutions that were evaluated and then developed through the process were the responsibility of a
Product Manager.
While other companies have built solutions development models that are
significantly different from their product development activities, iGate and the newly acquired Patni
decided to follow the more standard product development set of processes. The only major variance
was that there was a consulting analysis component at the front end to gain a deep understanding of
the customers needs.
Lessons Learned
In looking back upon the integration of the iGate and Patni solution development processes into one
that has become the backbone of the company, and a best practice in the industry, there are several
lessons that be pulled from their experience:
2. Focus
The combined portfolio that resulted from the acquisition had too many solutions offerings. This
prevented both sales and marketing from giving each solution the attention that it deserved.
The company ultimately decided that it would have only 4 broad solutions that it would invest in
and take to market. This intense focus has already paid off. Currently iGate is focusing on
newer solutions.
Integrating two different companies is always a challenge. For solutions businesses, getting the
offering development and implementation processes defined and smoothed out is an especially
thorny proposition. By all accounts, it appears that iGate has done a great job of moving from
the promise to the realization of the synergy and benefits it saw when it acquired Patni.