iGATE-PATNI DEAL ANALYSIS

Report submitted by :

Karan Razdan (10FN-052) Srikanth Konduri (10FN-109) Nikhil Gupta (10FN-121) Vaibhav Chaudhary (10FN-116) Swastik Dash (10FN-144) Vivek Sharma (10FN-146)

Table of Contents

BACKGROUND ......................................................................................................................................... 3 FINANCING THE DEAL ............................................................................................................................. 4 BENEFITS TO IGATE ................................................................................................................................. 4 ASSUMPTIONS ........................................................................................................................................ 6 VALUATION ............................................................................................................................................. 6 METHOD USED ........................................................................................................................................ 7 PREVIOUS TRANSACTIONS ...................................................................................................................... 7 CONSOLIDATED FINANCIAL OVERVIEW .................................................................................................. 8

BACKGROUND
Since 2007, efforts were made by private equity firm General Atlantic (has invested in Patni since 2002 and has gone beyond its timeline) and promoters to sell their share in the nations 7th largest IT firm by revenue (by Jan.2011), Patni Computer Systems.

IGate acquired a 63.38% (45.88% from the Patnis promoters, 17.5% from the PE firm General Atlantic) stake in Patni at `503 per share, paying a premium of 5.53% over the Patnis closing stock price of `463.65 on December 30, 2010. In accordance with the prevailing take over norms, as iGate was not willing to pay non-compete fees as part of the deal, it made a mandatory 20% open offer to Patnis shareholders at the same price of `503 per share and was reported to be fully subscribed. In total, for acquiring the 83.38% stake in Patni, IGate will require a funding of $1.22 bn. (`5498 Cr.) ($1 = `45.06). An overview of both the firms is shown below : (with an assumption that deal has taken place on 1 January 2011 for the purpose of analysis) Rs. Crore Financials: 2009 Revenue Net profit Net margin (%) Revenue Net profit Net margin (%) - Top client - Top 5 clients - Top 10 clients As of 07-01-11 As on 30-09-10 As on 30-09-10 Patni 3,043 556 18.3% 2,334 422 18.1% 11% 35% 48% 6,100 16,556 282 iGATE 869 129 14.8% 898 167 18.6% 35% 70% 84% 4,816 8,278 80 24,834 362 Combined 3,912 684 3,232 589
1

9m 2010

Revenue Matrix

Market Cap Headcount No. of active clients

It can be inferred from above that the combined entity will have a revenue size of `3912 Cr. ($0.87 bn) post acquisition as of FY2009. 3

FINANCING THE DEAL

The deal was financed using a combination of preferred convertible debt , debt and potential break up offer as shown below

Deal Value ($1.22 bn.)

Preferred convertible stock ($270 mn. + upto $210 mn.) Viscaria Ltd. 9Co. backed by APAX Partners)

Debt ($700 mn.) Jefferies & Co. and RBC Capital Markets

Potential Public Offer (4 200 mn.) (upto 10 mn. shares @ $20/share)

$270 mn. (Preferred convertible stock @ $20.3/share)

$ 210 mn. (optional) (Further issuance based on response to open offer and in lieu of potential public offer)

BENEFITS TO IGATE
The deal spells many positives for iGATE: o When small and midsize IT firms have been losing share to larger peers at an increasing rate in the past few years, iGATEs size would jump by about 3.5 times to over Rs. 4,500 crore or over a billion US dollars, which will help it compete with larger firms like TCS, Infosys and Wipro. o Besides the overall bigger size of Patni, which will not only let iGATE bid for larger deal, its clientele base will widen further and its risk of dependence on few clients will thereby reduce. As top 10 clients bring 84% of total revenues versus Patnis 48%, the acquirer will benefit from spread in business. o Patnis stronger manufacturing vertical will prove a good diversification form iGATEs present focus on BFSI. About 30% of Patnis revenues come from the manufacturing vertical i.e. over Rs. 900 crore in sales, as against iGATEs mere Rs. 200-225 crore from the same segment. o iGATE is likely to be the business developer, with Patni will provide the execution support from the back. Both the companies have around 80% of revenues being generated from US, with Asia Pacific accounting for less than 10% of revenues. Thus, business integration and client retention, two key challenges for any successful M&A, and more so for IT industry, will be a lot easier.

Besides management expertise, General Electric, being one of the biggest customers for both iGATE and Patni, will mean that the combined entity will gain immensely from synergies and eventual integration.

ASSUMPTIONS
The following assumptions were made while valuing the company:

Parameter (as on Dec. 2010) Sales growth % EBIT margin %

iGate 15% 30%

Patni 10% 32% 9% 19% 5% 1.7 (0f ADR listed in NYSE) 15.7%

Depreciation as % of 4% Sales Tax rate on EBIT 15% Terminal growth rate Unlevered Beta D/E ratio standalone WACC Exchange Rate 3% 1.19 10.5% 1$ = Rs. 46

VALUATION

iGate

Patni

Patni (APV)

Firm Value = Rs. 5372.92 Cr. Value per share = $ 20.5

Firm Value = Rs. 6795.55 Cr. Value per share = Rs. 507 Premium to CMP = 10.2%

Firm Value = Rs. 6922.63 Cr. Cash Flow from Tax Shield = Rs. 172.46 Cr. EV/EBITDA = 9.0x

METHOD USED
Fair Value from calculations. The valuation was carried out using FCF method. APV method was also used.

PREVIOUS TRANSACTIONS
A few similar transactions that can be used to compare the transaction multiples are as follows: Deal Year Valuation EV/EBITDA

Tech Mahindra Ltd. Purchased 31% stake in Satyam Computer Services Ltd. EDS Corp. acquired Mphasis BFL Oracle Corp acquired i-flex Solutions Ltd.

2009

$1.13 billion

2006

Rs. 1748 Cr.

16.1

2005

Rs. 4090 Cr.

19.6

CONSOLIDATED FINANCIAL OVERVIEW

References
http://www.patni.com/media/686782/IGTE_News_2011_5_12_Financial_Releases.pdf http://www.patni.com/media/653610/igp_PR_168iGATE_Announces_Pricing_of_Senior_Notes_ to_Fund_Patni_Acquisition.pdf http://www.dnaindia.com/money/report_merger-seen-giving-igate-patni-scale-but-littleelse_1489439 http://www.cio.com/article/683817/First_Fire_the_Executives_iGate_Patni_CEO_on_His_Merg er_of_Unequals http://www.paulwriter.com/blogs/item/237-why-patni-igate-merger-might-not-work http://blogs.wsj.com/indiarealtime/2010/12/02/can-igates-murthy-pull-off-patni-merger/ http://articles.economictimes.indiatimes.com/2011-01-25/news/28431104_1_igate-sunilchitale-patni-computers http://www.horsesforsources.com/patni-igate_011011 http://trak.in/tags/business/2011/01/11/patni-igate-merger/ http://www.cio-asia.com/mgmt/outsourcing/igate-patni-ceo-on-his-merger-of-unequals/ http://www.indianexpress.com/news/patniigate-deal-good-sign-for-m&as/736093/ http://www.patni.com/media/696823/FE_May_14_2011.pdf http://www.patni.com/media/700187/Investors.com.pdf