iGate announced its acquisition of a majority stake in Patni.
iGate with Apax Partners, will acquire 63% of the company for the final price of Rs. 503.50 effectively valuing Patni, the company at $1.5 Billion. By Indian law, iGate will have to make an open offer to acquire an additional 21% of the company.
With that, a company with revenues of about $200 million in 2009 acquires control of a company with revenues of about $650 million. Even by market cap, iGate is a third smaller than Patni. You won’t see this python-swallows-an-elephant acquisition happen too often in any industry.
What made it possible was the difference in the growth in earnings. Which in turn is because of the difference in how well the two companies are managed (see last year’s stock performance below). Based upon yesterday’s price, Patni’s P/E is around 10 and iGate’s is around 22. The difference is big enough for any private equity firm to drive a truck through.
About a year back I had wondered why the offshore services industry wasn’t consolidating. I had argued the case for scalar acquisitions
But a scalar acquisition strategy – basically bulking up – can make a lot of financial sense. If you are a well managed company with a P/E that is higher than the industry, an active acquisition strategy can make sense.
First, if you can negotiate a price for the target that is somewhere at or below your P/E, you are already looking good.
Second, acquiring a company with a similar business, has fewer integration risks.
Third, this industry, even though it has low entry barriers, is a business of scale. Visibility, brand, lower sales costs and overheads – all come from scale.
When I wrote that piece, I didn’t quite have this python-swallowing-elephant kind of an acquisition in mind. But this is, in fact, a scalar acquisition. Although the integration on this one won’t be easy.
Indian law makes it difficult to outright acquire a company. Mahindra Satyam and Tech Mahindra are still separate companies. Until Patni is fully acquired, integrating management is difficult. Eliminating costs is difficult. Benefitting from having a common brand and go-to-market is not going to be possible. But I’m sure iGate and Apax would have carefully thought through these issues. It’ll be interesting to see how the integration takes shape in the coming months.
Nonetheless, this is a big deal with lots of potential to create value. If there is someone who can pull this off it is Phaneesh Murthy. He’s done superb job with iGate. Congratulations, Phaneesh! And good luck.
Congratulations also to Shashank Singh at Apax Partners for a very significant deal.