Both are similar on most metrics

BL Research Bureau | Updated on January 21, 2011

Valuation in line with past deals

The iGATE-Patni association appears to be a desirable marriage, what with very limited overlap in clients, similar expertise in terms of service lines, and near identical geographic- and effort-mixes.

Even the margin-profile for both the companies are similar with the net margin being around 18-19 per cent.

In all aspects, the merger would create scale for iGATE making the combined entity a one that would be more than a billion dollars in revenues.

The deal, struck at Rs 503.5 a share of Patni, is at a valuation discount to listed peers such as MphasiS and Mahindra Satyam on both price-earnings and EV to EBITDA multiples, which we had mentioned about a week earlier when a similar deal price was being talked about.

Although, compared to the past domestic acquisitions such as Wipro-CTS deal or the TCS buyout of e-Serve, the iGATE's – Patni deal, at nearly two times the target company's revenues, seems to be in line with past precedent. From a business perspective, the integration of the two entities may not be that challenging given that there are just two overlapping clients, one of which is GE.

For iGATE, its top 10 clients account for nearly 84 percent of its revenues, making a concentrated profile. With Patni in its fold, the number of clients and the combined entity's larger scale would allow it to target higher value deals and also mine existing clients better.

For large measure, both iGATE and Patni predominantly deliver application development and maintenance services. Also, both derive over 80 percent of revenues from the US, and have a near similar offshore-onsite effort mix of 79:21 and 74:26, respectively.

On all these counts, the integration or a possible merger may not be very challenging.

The biggest advantage from this acquisition, of course, comes from being able to compete for large (in excess of $100 million) deals.

Synergies may come from iGATE getting deeper into manufacturing and Patni more into banking verticals.

Published on January 21, 2011

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