If life's a roller-coaster ride, it is epitomised in Phaneesh Murthy. Eight years after hitting the lowest ebb of his 22-year-career in the IT industry, the CEO of iGATE Corporation is at the cusp of scripting an historic ‘David-Goliath' story.
Last week, a consortium headed by iGATE (with PE firm Apax Partners as the other member) agreed to go in for a leveraged buy-out of Patni Computer Systems at Rs 503.5 per share for a 63 per cent stake.
As mergers go, this is a fairly synergistic one: a high-growth, innovative company acquires a bigger but staid competitor in Patni.
Though the deal is expected to make iGATE a new member of the $1-billion club (in annual revenues), it is a transaction ridden with risks. Given that iGATE is swallowing a company 2.5 times its size, in addition to raising debt of $700 million and issuing equity of $270 million (to its consortium partner), the post-acquisition ride will be a bumpy one.
Managing this quantum of debt would be unusual for iGATE, considering that IT outsourcers have historically been cash-rich. Not to mention the impending task of integrating two culturally dis-similar companies with divergent management styles.
“While the cultures at both firms may look similar to outsiders, the way things are done at each company may actually be very different. Mergers bring these hidden differences to the surface,” says Peter Schumacher, CEO of advisory firm Value Leadership Group.
The other Murthy, as the 47-year-old-CEO of Nasdaq-listed iGATE is known in industry circles, is ready for the plunge. Though he agrees that his approach is unconventional, Phaneesh Murthy does not like the term ‘roller-coaster'.
“Personally, I have always been a guy who likes to change rules of the game…yet for a south Indian guy with middle-class roots it took me a lot of time to get comfortable with $700 million, which looked like a lot of debt,” Murthy told eWorld.
Even if the growth in the IT industry slows down, Murthy is confident of retiring the debt in five years purely because the two companies have a combined EBITDA of $210 million and cash in hand of $450 million.
Attrition concerns
Another fear that the merger has brought is that of customer attrition. Though Murthyhas sought to allay these fears by citing that top customers, including GE, are backing the new combine, analysts do not seem to be convinced yet.
“Ironically, in the books of Patni's clients, Patni ranks number two or three or even four in the supplier list, going by business size ranking. A lot of Patni's work is of application maintenance type (65 per cent of Patni's revenue comes from application development and maintenance work) and it enjoys a very limited indispensability. Desperate to grow, incumbent competitors will continue eating into Patni's base,” says Sudin Apte, CEO of advisory firm Offshore Insights.
Yet, Murthy is confident that the market will see the benefits of the deal once the two companies are integrated. For starters, clients will be happy that the ‘for sale' board (at Patni) has gone off.
“In the 90's we managed to make things faster, cheaper, better and deliver from offshore (locations) for our clients. At iGATE we changed the business model to bill clients based on the business outcome they derive…with Patni we are increasing the competitive streak in the industry,” he says.
The ‘90's' is actually an allusion to the ten eventful years that he spent in the Americas, building the overseas business for one of the country's top IT shops: Infosys.
Phaneesh Murthy's tryst with the services space started with Sonata Software, a start-up in a tiny industry whose market leader Tata Consultancy Services had a turnover of barely $15 million in 1987. While he was focused on the domestic IT space at Sonata, Infosys gave him the opportunity to relocate to the US and become second only to Narayana Murthy in terms of popularity within the company ranks.
The senior Murthy is said to have relied heavily on Phaneesh Murthy who, as the head of its sales and marketing division, has been credited for his role in steering Infosys' revenues from $2 million to $700 million in ten years.
The American saga, however, came to an abrupt end in 2002, after a sexual harassment case was filed against him by a female colleague. This came at a crucial juncture in Murthy's career as he was being talked about as future CEO material.
After moving out of Infosys, Phaneesh Murthy founded Quintant Services. Shortly after, the company was acquired by software services firm iGATE Global Solutions (earlier known as Mascot Systems). Since it was a reverse merger, Phaneesh Murthy was asked to take over the management as the CEO of the company.
Though Phaneesh Murthy was back in the scheme of things with iGATE, it never gave him the grand canvas that he was used to at Infosys.
“When you start your own company it takes time to stabilise and to create scale. Moreover, not many people were worried about us (iGATE) because we had a differentiated business model but not the size or scale to threaten the big boys,” the CEO of the 8,000 staffer company said.
Having the right size is of paramount importance in an industry with over 150 vendors who render identical services. And that is precisely why the iGATE team, comprising chief financial officer, Sujit Sircar, and director of corporate strategy, Salil Ravindran, evaluated over 20 companies in the last two years alone for a potential acquisition.
iGATE would have realised its dream of clocking $1 billion in revenues back in 2009 if it had agreed to acquire Satyam Computer Services after ex-chairman B Ramalinga Raju confessed to deliberate falsification of the company financials. Though iGATE evinced interest in the initial stages, it decided not to go ahead with the bidding, citing concerns of legal liabilities and class-action suits. Murthy says he was worried that the ‘physical factors' of success for pulling off the Satyam deal were not within his realm of influence. “The physical factors of success were not in winning customers or delivering value but in how you manage the legal liabilities and handle transaction lawsuits. If we acquired Satyam we would have had to rely completely on outside help for all of that. It is an awkward situation if the CEO has to rely on external factors for success,” he says.
Finally, Tech Mahindra acquired Satyam and has since managed to stabilise the scam-hit company. However, Phaneesh Murthy does not have any regrets.
“Hindsight is 20/20 vision… I always believe I make the best decision with the information available at that point in time,” he says.