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MACR Project Report (2)
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Transcript of MACR Project Report (2)
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......................................................................................................................................6
PREVIOUS TRANSACTIONS.....................................................................................................................7
CONSOLIDATED FINANCIAL OVERVIEW.................................................................................................7
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BACKGROUNDSince 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 nation’s 7 th largest IT firm by revenue (by Jan.2011), Patni Computer Systems.
IGate acquired a 63.38% (45.88% from the Patni’s promoters, 17.5% from the PE firm General Atlantic) stake in Patni at `503 per share, paying a premium of 5.53% over the Patni’s 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 Patni’s 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 below1: (with an assumption that deal has taken place on 1 January 2011 for the purpose of analysis)
Rs. Crore Patni iGATE CombinedFinancials:2009 Revenue 3,043 869 3,912
Net profit 556 129 684Net margin (%) 18.3% 14.8%
9m 2010 Revenue 2,334 898 3,232 Net profit 422 167 589 Net margin (%) 18.1% 18.6%
Revenue Matrix - Top client 11% 35% - Top 5 clients 35% 70% - Top 10 clients 48% 84%
Market Cap As of 07-01-11 6,100 4,816
Headcount As on 30-09-10 16,556 8,278 24,834No. of active clients As on 30-09-10 282 80 362
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.
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FINANCING THE DEALThe deal was financed using a combination of preferred convertible debt , debt and potential break up offer as shown below
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, iGATE’s 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 Patni’s 48%, the acquirer will benefit from spread in business.
o Patni’s stronger manufacturing vertical will prove a good diversification form iGATE’s present focus on BFSI. About 30% of Patni’s revenues come from the manufacturing vertical i.e. over Rs. 900 crore in sales, as against iGATE’s 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.
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Deal Value ($1.22 bn.)
Preferred convertible stock ($270 mn. + upto $210 mn.) Viscaria Ltd. 9Co. backed by APAX
Partners)
$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)
Debt ($700 mn.) Jefferies & Co. and RBC Capital
Markets
Potential Public Offer (4 200 mn.) (upto 10 mn. shares @ $20/share)
o 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.
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ASSUMPTIONS
The following assumptions were made while valuing the company:
VALUATION
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iGate
Firm Value = Rs. 5372.92 Cr.Value per share = $ 20.5
Patni
Firm Value = Rs. 6795.55 Cr.Value per share = Rs. 507Premium to CMP = 10.2%
Patni (APV)
Firm Value = Rs. 6922.63 Cr.Cash Flow from Tax Shield = Rs. 172.46 Cr.EV/EBITDA = 9.0x
Parameter (as on Dec. 2010)
iGate Patni
Sales growth % 15% 10% EBIT margin % 30% 32%
Depreciation as % of Sales
4% 9%
Tax rate on EBIT 15% 19%
Terminal growth rate 3% 5%
Unlevered Beta 1.19 1.7 (0f ADR listed in NYSE)
D/E ratio standalone - -
WACC 10.5% 15.7%
Exchange Rate 1$ = Rs. 46
METHOD USEDFair 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.
2009 $1.13 billion
EDS Corp. acquired Mphasis BFL
2006 Rs. 1748 Cr. 16.1
Oracle Corp acquired i-flex Solutions Ltd.
2005 Rs. 4090 Cr. 19.6
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CONSOLIDATED FINANCIAL OVERVIEW
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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-little-else_1489439
http://www.cio.com/article/683817/First_Fire_the_Executives_iGate_Patni_CEO_on_His_Merger_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-sunil-chitale-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
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