iGate-Patni Deal Signals Consolidation Trends

The $1.22 billion deal between iGate and Patni Computer Systems is triggering further consolidation for small and mid-sized IT and ITES companies to move up the value chain and stay in this highly competitive business. The merger and acquisition trend in the mid-size IT space started in 2008, when MindTree acquired Aztecsoft. In 2009, the IT sector saw close to 92 M&A deals, mainly in the small and mid-sized IT space. The number of M&A deals increased to 115 in 2010, and industry analysts feel that 2011 will see further substantial increase in M&As.

The consolidation is happening as the industry is growing and margins are under pressure. According to a NASSCOM report, the IT-BPO industry is likely to report revenues of $73.1 billion in 2010, with the IT software and services industry accounting for $63.7 billion in revenues.

The NASSCOM report estimates export revenues to gross $50.1 billion in 2010, rising by 5.4 percent over 2009 and contributing 69 percent of the total IT-BPO revenues. Software and services exports (including BPO) are likely to account for over 99 percent of exports, while employing 1.8 million individuals. IT services is expected to grow by 2.4 percent in 2010 and 4.2 percent in 2011.

The consolidation is assisting midsized IT companies to compete against bigger entities. Creating huge assets and revenue base is important to vie with companies such as TCS, Wipro, Infosys, HCL, and the like. For iGate, the cost-per-employee will go up following the acquisition of Patni. The combined revenues of this entity will be a whopping $1 billion, with 24,834 people employed globally as of September 30, 2010. The transaction is expected to be completed in the first half of 2011.

The merged company will be a key player across several vertical industries, including banking & financial services, insurance, manufacturing, retail, and media & entertainment. The new entity will create a go-to-market strategy with iGATE’s differentiated iTOPS and outcomes-based business model augmented by Patni’s delivery expertise, and it will focus on micro-verticals.

“We believe the threshold of a billion dollar revenue will facilitate faster adoption of our iTOPS for Business Outcomes model. We also believe that the combination will help customers get better service, access to more service lines and deeper pools of expertise,” said Phaneesh Murthy, CEO of iGATE Corporation.

Both companies will have a strong presence in the market place. The increase in the total number of employees, additions of focused verticals and a proven management team are expected to strengthen iGATE’s position as a toptier player in the highly-fragmented global IT industry.

iGATE will fund the deal worth $1.22 billion through a combination of cashin- hand, debt and equity financing, including a potential public offering of up to 10 million shares. Though the deal is backed by its financiers, PE investors, etc., the Nasdaq-listed iGate’s shares fell by 11 percent on the day of the announcement.

Analysts feel that the integration of iGate and Patni will be tricky since iGate is a relatively small company compared with Patni Computer Systems. Some analysts feel that the deal is undervalued and favor iGate in the long run. India will see more such consolidation in coming months as the appetite to win is shooting up.