Patni Computer Systems, a Mumbai-based software outsourcing business, is being acquired by iGate, a US rival, in a deal valuing the company at $1.22bn excluding debt.
The deal could herald a wave of consolidation among smaller players in the highly competitive industry.
In one of the largest deals in India’s technology sector, iGate’s agreed takeover comes as medium-sized IT outsourcing companies groups see their margins squeezed by larger groups.
“Small and medium companies are getting marginalised by their bigger competitors,” said Sudin Apte, principal IT analyst at Offshore Insight. “This deal will give iGate some headway to grow ... and I think other smaller IT groups will follow them as that’s the only way they can survive in this market.”
iGate said on Monday that it would pay $921m to buy a 63 per cent stake in the medium-sized Indian IT group from Patni’s founders and private equity firm General Atlantic. It has secured $270m in funding from Apax Partners, another private equity company.
At Rs503.50 a share, the deal represents a 9.4 per cent premium to Patni’s closing price on the Bombay Stock Exchange last week.
iGate will follow with an open offer to acquire a further 20 per cent from Patni’s remaining shareholders, which will be worth $301m, according to the US group.
“It has been our stated intent to scale revenues, customers, and expand our vertical capability,” said Phaneesh Murthy, chief executive of iGate. “We think that this deal is extremely strategic for iGate.”
After the merger with Patni, which is also listed on the New York Stock Exchange, iGate will have a global workforce of more than 25,000 and is expected to generate $1bn in revenues, according to Mr Murthy.
The deal received mixed reviews from IT analysts as it remains unclear how iGate, which is significantly smaller than Patni in sales, will integrate the Indian outsourcer without losing clients and talent.
Patni posted revenue of $689m for the 12 months ended on September 30 2010, while iGate reported revenues of $252m in the same period.
Soumitra Chatterjee, an analyst at Espirito Santo securities, said: “While there won’t be any significant impact on net margins post the proposed merger, the key question is will iGate be able to integrate Patni, extract synergies out of its sales team and enhance shareholder value?
Jan Erik Aase, an analyst at Forrester Research, said: “The sum of the two will be greater than the current strength of each individually.”
iGate was advised by Jefferies while Patni hired Credit Suisse and Ambit Capital to assist it on the deal.