iGate's Acquisition of Patni: Great Expectations

With the acquisition of Patni Computer Systems, one of Indias oldest IT firms, by a consortium of Phaneesh Murthy-led iGate and PE firm Apax Partners, speculations about the future of Indias only true tier-2 independent diversified IT services firm have finally rested. The possibility of a stake sale and the lack of consensus about the sale have made it to the headlines for the last 4 years.

The $921 mn acquisition is the biggest acquisition of an Indian company by another Indian company. While iGate is now listed only in the US, Patni is listed both in India and the US. In the annual DQ Top 20 ranking, Patni occupied the #19 slot in 2010 while iGate was 61.

For the last few years, Phaneesh Murthy, who worked as chief marketing officer of Infosys at one time, has tried to create a separate business model for his company, succeeding only partially. iGate has witnessed sluggish growth in the last 2-3 years, not the least because of the mortgage meltdown. Mortgage was one of iGates biggest thrusts.

The Patni acquisition will give iGate the much-needed scale. But it is difficult to believe that Murthy is buying Patni only for scale. While an inorganic growth would give him some room for trying his new ideas, he could also use Patnis inherent strengths to create completely new opportunitiessomething he has not shied away from in the past. iGate is the only company other than Accenture, TCS and Cognizant to enter the clinical data management space, for example.

Leveraging the Strengths

So, what could Murthy do with Patni?

One, he could use Patnis product engineering strength to get into end-to-end product design space. Patni draws almost one-fifth of its revenue from engineering services. It is focused on areas like consumer electronics, telecom, medical electronics, and other consumer products where exterior design could complement the existing strengths. This is a white space, with just one company, Aricent trying to address it with its new Ideas 2 Market venture. With Patnis product engineering strength, iGate could look at acquiring a design company to offer end-to-end product design from India.

Two, Patni has a significant presence in the Japanese marketboth in the IT and engineering services areas. Murthy could use that to build a completely new growth opportunity.

Three, Patni has always been a major player in insurance. Now, it is working to translate that strength to scale up BPO business in that area. Insurance is probably the most suitable vertical to have an integrated IT-BPO play, anywhere in the world. And that is the stated strategy of iGate. iGates iTOPS model would work best in this area.

Ever since the acquisition of Mphasis by EDS, Patni has remained in a category of its own. The only other diversified IT company that comes anywhere close to Patni is L&T Infotecha company that is owned by one of the largest corporations in India. Its acquisition may well mark another round of consolidation in the industry.

The Big Question

Does iGate have enough management depth?

On paper, adding Patni and iGate looks good. But does iGate have the management capability to handle integration of a company 3 times its own? On the face of it, it is a valid question in any merger. But the question also makes an inherent assumption: that it is iGates current management that would be in charge. This has been the norm in most recent large acquisitions.

But it need not be. Typically, companies that are sold see exodus of top managers because of the shock factor and the sudden change. That would not necessarily be the case in Patni. All the top managers who are in Patni knew that the company was going to be acquired and they were prepared for it. Further more, most client facing managersheading verticals and geographiesare anyway new people who have joined the company in the last 12-18 months, after the current CEO Jeya Kumar took over.

So, it may be wrong to assume that the exodus will happen just because of the acquisition.

Our Small Question

Can it do it without diluting its Preferred Employer status?

A question that is not being askedas it does not matter to the analysts crunching numbers in the immediate runis that will iGatewhich has remained among the top three employers in our list of DQ-IDC Best Employers for last few years, topping it in 2009remain an employees favorite with its new size?
That is a tough one, we believe.

Shyamanuja Das
shyamanujad@cybermedia.co.in