TheBig deal: Joining the big league

K. VENKATASUBRAMANIAN | Updated on January 17, 2011

The Patni Computer Systems Ltd. company logo is displayed in Mumbai, India, on Monday, Jan. 10, 2011. IGate Corp. agreed to buy Indian software maker Patni Computer Systems Ltd. for $1.22 billion to tap rising demand for technology services. Photographer: Adeel Halim/Bloomberg   -  Bloomberg

After a brief uncertainty, iGATE has successfully managed to acquire a 63 percent stake in Patni Computer, to make the combined entity that would be over a billion dollars in revenues. The deal has been done at Rs 503.5 a Patni share, resulting in iGATE paying $921 million for the stake. The price point offers interesting insights on the relative valuations at which this stake sale has happened. If compared on the basis of PE or EV to EBITDA multiples, the deal has been struck at a discount to peers such as Mphasis and Mahindra Satyam. Going by ratio of the market capitalisation of Patni to its revenues (1.9 times) the valuation is at a premium to peers. This may be attributable to the relatively slow pace of top-line growth that Patni has managed over the last 3-4 years. But going by past acquisitions of captive units such as the Wipro-CTS deal or TCS buying out e-Serve ,where deal size to target company's revenues were 1.8-2 times, the Patni stake sale at nearly two times seems reasonable. The iGATE-Patni association has many positives, what with very limited overlap in clients, similar expertise in terms of service lines, and near identical geographies. Even the margin profile for both the companies is similar, with the net margin being around 18-19 per cent. The key takeaway from this acquisition, of course, is the combined entity now acquiring the capability and scale to compete for large ($100 million plus sized) deals along with top tier IT companies. Synergies may come from iGATE getting deeper into manufacturing and Patni more into banking verticals.

Published on January 17, 2011

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