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.
6 am pacific 
You say “You won’t see this python-swallows-an-elephant acquisition happen too often in any industry.”
A few transactions to cite… Roughly 4 years back, Tata Steel acquired the Anglo Dutch giant Corus Group Plc for US$ 12.11 billion (€ 8.5 billion). At the time Tata Steel was ranked 63rd in the world and Corus was ranked no.3 in terms of revenues… A month or so later Hindalco (2006 revenues $2.6 Bn) acquired Novelis of Canada (Revenue $8.4 Bn in 2006) in a $6 Bn deal…. Then came Tata Motors buying out Jaguar Land Rover division of Ford Motors, but this can be argued as a partial acquisition though…
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On Oct 19, 2006, a day before the Tata Steel board approved a $7.6 B bid for Corus its market value was around $8.8B at today’s exchange rates. I assume that means that Corus’s market cap was smaller that Tata Steel’s. Eventually, Tata Steel ended up paying considerably more, but this became the largest Indian acquisition ever. An exceptional deal.
When I say, “you won’t see it happen too often” I mean that it is an exceptional deal. If you want to refute that statement, you can’t point to a couple of exceptional deals. You have to take a look at M&A data globally. If you find that a significant % of M&A deals are ones where a smaller company acquires a bigger company, come back and refute me.
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45% of Corus equity was held by way of treasury stock that is not included in the market cap of $8.8 Bn you had indicated…. Tata Steel was significantly smaller company in comparison to corus as per the rankings… As opposed to Tata Motors -JLR deal, Tata Corus was cash accretive from day 1, except for the unforeseen meltdown in Europe that followed that kicked the can further down the road…
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The rankings of Tata Steel and Corus cited in my foregoing comment is across the global steel industry, not across industries….Sorry for the shorthand…
Further you say “Indian law makes it difficult to outright acquire a company. ” Hardly. The issue is most Indian promoters are averse to total sell out as they prefer handing control down their future generations… Indian law is very clear on the subject. The acquirer will have to buyout the entire shareholders and when the public float goes below 10%, the company even qualifies for de-listing from the stock exchanges, thereby making it easier to acquire the remaining 10% as they are left with no choice but to sell out to the majority holder… Times have changed a lot now.
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Oracle acquired iFlex. But iFlex, or Oracle Financials is still publicly listed in India. EDS acquired BFL. BFL is still publicly listed in India. Tech Mahindra acquired Satyam. Still separate companies.
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In all the three cases, the open offer price offered was so low that the minority shareholders holding float (constituting not in excess of 33% of total shareholding and not less than 10% ) did not subscribe to the tender offer… The companies didn’t want to up the offer price and mop up the floating stock, hence the deadlock… And no law of equity would allow companies to shortchange minority shareholders if they enjoy substantial voting power in excess of 10%…Only in the case of Cadbury India, the company tried to act up and the courts came down heavily in due exercise of its powers under S.397 and 398 of the Companies Act that seeks to forbid oppression and mismanagement, and that was so befitting since the company tried to circumvent the law… Only area in which Indian company law could be more liberal is freeing up managerial remuneration, but the so-called developed economies indulged in such excesses that even the CII and chambers of commerce out here lost out their voice completely and do a re-think on that count… :-)))
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