On Tuesday, a day after Bangalore-based iGate announced that it has acquired a 63 per cent stake in the Mumbai-based Patni Computers, there was a major selling pressure on Patni stock which dropped to Rs 446 from 464 on the previous day’s closing - a loss of 4 per cent or 18 points.

A total of 21 lakh Patni shares worth Rs 94.37 crore changed hands in the Bombay Stock Exchange on Tuesday. In fact, Patni stock has lost 9 per cent (Rs 50 from Rs 490) since the takeover talks were reported in the middle of December 2010.

Shareholders are concerned that acquisition of a much larger and older Patni (expected annual revenue $700 million) by a younger and smaller iGate (expected annual revenue $300 million) may lead to major integration issues for the combined entity.

“They are also worried that iGate has taken a huge debt on itself for the acquisition and may use Patni’s surplus cash for paying debt,” said a research analyst in a Mumbai-based broking firm. Investors cannot be blamed for being cagey. iGate CEO Phaneesh Murthy, while announcing the takeover on Monday admitted that the integration of the two companies will be a very big challenge as they operate in different verticals, they have different cultures and the total number of employees will reach 24,834 after adding 16,556 people from Patni.

“We know that an integration if these size will pose many challenges but it is not impossible. Our immediate aim is to have a virtual integrated management team created from the top leadership teams of two companies,” Murthy said. iGate’s first aim is to have integration within the management teams and have a common go-to-market strategy.

Huge debt burden

Talking to Deccan Herald, global outsourcing advisor Tholons Managing Director (India operations) Nishant Verma also agreed that integration will be one of the biggest challenges for iGate. “Integration of two quite different companies into a common front will not be an easy job. Besides there will be issues related to re-branding and re-positioning as one entity at the market place.”

Verma said. The other big concern is the huge debt iGate is taking on its books to acquire Patni. The debt-free iGate will borrow $700 million (Rs 3,500 crore) from banks to pay for the Rs 5,560 deal to buy 83 per cent stake in Patni.

iGate is also  issuing optionally convertible preference shares (which are quasi debt) to a PE firm Apax Partners worth $270 million. If Apax does not convert its preference shares into equity shares, the total debt will be $970 or close to $1 billion or Rs 4,560 crore. It is really unusual for an IT company to take so much of debt, but iGate did not have a choice, pointed out Verma.

But a company taking debt of more than double of its revenue is surely risky. Murthy also said on Monday that being a conservative South Indian Bramhin, he is not very comfortable with so much of debt sitting on his balance sheet and he will find ways to take it off as quickly as possible. 

Talking about the debt burden, iGate Chief Financial Officer Sujit Sircar agreed that the $700 million debt does look a big number. It is 3-3.5 times of EBIDTA (earnings before interest, depreciation, tax and amortisation), but if Patni’s reserves are taken into account the net debt is only 2 times and is manageable, Sircar told Deccan Herald.

A trendsetter

Financials apart, analysts believe that the move to buy Patni is certainly a bold move and iGate can be a trend setter in the M&A activities in the software industry.  

“Overall M&A activity in the country should be good but there will be very few deals in the IT industry because there are only 8-10 Indian companies in this space. We will witness billion dollars deals but small transaction will be seen,” SMC Capitals Equity Head Jagannadham Thunuguntla said.

The IT consulting firm Forrester Research also thinks positively about the deal. Forrester’s Principal Analyst, Jan Erik Aase told Deccan Herald that the combination of Patni and iGate is synergistic, and the sum of the two will be greater than the current strength of each individually.

On the issue whether Patni clients will be wary about iGate’s capability and if they will look for other vendors, Aase said, “It is expected that current Patni customers would be cautious and concerned, but it would be unwise to assume that they are ready to switch vendors.”

The reality is, Application Development & Maintenance transitions are not easy, they have the potential to cause a lot of disruption, and are more likely to impact the client’s end customers, he explained. He is also of the view that clients’ current priorities are focused on new technologies and keeping pace with their industries, and if they are happy with their existing vendor they won’t look out for a change.

iGate makes open offer for Patni shares

Mumbai, pti: Patni Computer Systems today said that the US-based IT firm iGate has made an open offer for the 20.6 per cent stake in the company, in accordance with the requirements of the market regulator Securities and Exchange Board of India (SEBI).

Yesterday, after several rounds of negotiations, the US- based iGate-led consortium clinched a deal to buy nearly 63 per cent stake in India’s sixth largest IT firm Patni Computer for about USD 921 million (Rs 4,188 crore).

“The Acquirers—-iGATE Solutions and iGATE Global Solutions Ltd and iGATE Corporation hereinafter referred to as person acting in concert (PAC) propose to acquire 2.70 crore shares of the Target Company representing 20.6 per cent of the Current Equity Capital of the Target Company, at a price of Rs 503.50 per share,” Patni said in a filing to the Bombay Stock Exchange (BSE). iGate’s open offer for Patni will start on March 4 and close on March 23, the filing added.

The deal size will go up to about USD 1.22 billion (more than Rs 5,400 crore), after acquisition of 20.6 per cent from public shareholders at the same price of Rs 503.50 per share through the mandatory open offer.