ASSIGNMENT

OF
FINANCIAL
MANAGEMENT
Submitted to: Submitted by:
CA Pankaj Kapoor Abhinav Rajesh Arora
0181MBA023
MBA-II-‘A’
 Introduction

The year 2010 could have broken the record $69.4 billion M&As deal done in 2007 –
when Tata Steel bought the Anglo-Dutch Corus Group – had few $billion plus deal as
anticipated taken place during that year. iGate-Patni Computer was among such few deals.
However, after negotiations and sustained media speculation for several weeks, on January
10, 2011, the acquisition of up to 83 per cent stake in Mumbai-based IT services and
business solutions - Patni Computer Systems Ltd. by NASDAQ listed iGate Corp was
announced. The deal, valued at $1.22 billion, makes this one of the largest acquisitions in
the technology sector in India, the largest being the acquisition of a controlling stake by
Oracle Corporations in i-Flex solutions at a value of $1.5 billion in the year 2005. The deal
in true David Vs Goliath style saw iGate headed by CEO Phaneesh Murthy, originally the
founder of Infosys - N R Narayana Murthy protégé, acquiring a company three times the
size of iGate in terms of annual revenues. The acquisition of $690 million Patni by $250
million iGate created an entity with a combined value of about a billion dollars and a force
to reckon within the technology outsourcing industry.

Phaneesh Murthy, in his interview published in TOI dated January 11, 2011, to a
question replied that it was quite challenging to convince the shareholders about the
synergy and gains, raise funds at an affordable cost, negotiate the deal with family
promoters and handle queries from the media and analyst community.

Through its consortium, Pan-Asia iGate Solutions, iGate, initially acquired the 45.6%
stake of the three Patni Brothers – Narendra, Ashok & Gajendra. It also acquired General
Atlantic’s 17.4% stake, followed by 20% from public shareholders at the same price of
Rs.503.5 a share through the mandatory open offer on April 27, 2011.
Theoretical Framework

Corporate restructuring has become an unavoidable process for the companies across
globe. Mergers, amalgamations, divestitures and so on, referred to collectively as
corporate restructuring, are important strategic tool adopted by companies to grow and
remain in the business. Acquisition is a broad term and includes all forms of mergers viz.
horizontal, market extension, product extension and vertical merger. Research has shown
that the majority of mergers were taken to derive the benefits of economies of scale,
increase market share, achieve efficient utilisation of resources and develop new resources
and capabilities. Daimler-Benz and Chrysler, Lipton India and Brooke Bond, ICICI Bank
and Bank of Madura are some of the examples of horizontal mergers. The iGate
acquisition of Patni Computers and later its merger with itself is among the largest
horizontal merger in Indian IT sector.

Information Technology Background and Road Ahead

India’s IT sector is the world’s biggest sourcing destination, accounting for

approximately 52% of the US$124 – 130 billion market. The Indian IT industry is highly
export oriented and it stands fourth in India’s total FDI share and accounts for
approximately 37% of total private equity and ventures in the country. The USP of Indian
IT sector is its cost competitiveness in providing IT services in the global sourcing market,
at a cost that is 3-4 times cheaper than the west. The Indian BPOs (ITES) are moving up
the value chain. Apart from being cheaper, the Indian IT industry, over the years has also
moved up the value chain and has been handling high end data for even financial service
sector like insurance, banking and mortgage companies, airline information, enterprise
resource planning among others and higher value added segments such as product design,
development and support, mission critical applications, HR management, knowledge
process outsourcing and large complex projects. The share of the IT sector in India’s GDP
growth rose to approximately 8% in FY 2014. The revenue stream to IT industry comes
from Business Process Management (BPM), IT services, software products and
engineering services and hardware.
The export of IT services accounts for more than half of total IT exports excluding
hardware at 57.9% (See Figure 1). Figure 1. Share of IT Products

Source: NASSCOM 2014

In a report title ‘The SMAC Code – Embracing New Technologies for Future
Business’, CII estimates that the IT-BPM sector in India will expand at a CAGR of
9.5%to US$225 billion by 2020.

For the IT-BPM industry, BFSI (Banking, Financial Services and Insurance) is a key
business vertical, accounting for 41 per cent of total IT-BPM exports from India at a value
of US$36 billion in FY 2014. The four sectors – BFSI, manufacturing, telecom and retail
together accounts for approximately 85% of total IT-BPM exports from India (See Figure
2). Figure 2. Share of Products under IT-BPM

Source: NASSCOM 2014

(BFSI = Banking, Financial Services, Insurance. T&M = Telecom & Media. T&T =
Travel & Tourism. C&U = Construction & Utilities)
 Globalization has resulted in Indian IT industry capturing a sizeable share of the global
market becoming the leader in providing technology outsourcing and business services. In
the past verticals like insurance, banking, finance, telecommunication, manufacturing have
been the growth drivers of the Indian IT industry. But off late, newer verticals like mobile
applications, health care, climate change, energy efficiency and sustainable energy will
boost the growth. As technology is playing a major role in business, traditional business
houses and SMEs are using IT application and services. The software exports recorded a
growth of 11.36% touching $88 billion in 2013-14. NASSCOM has made a forecast for
software exports estimating a 13-15% increase during fiscal year through 2015 projecting
a rise to as much as $98 billion in 2014-15 from about $88 billion in 2013-14 (See Table
1). However, it has lowered the growth range to 12-14% for 2015-16.
Table 1: India IT-BPM revenues

Revenues ($ billions)

FY FY FY FY
FY 08 FY 09 FY 10 FY 11 12 13 14 15E

Domestic 22 20 24 29 32 32 42 48

Export 41 47 50 59 69 76 88 98

Total 63 67 74 88 101 108 130 146

Source: NASSCOM
iGATE Corporation

iGate is the brand name of IGATE Corporation and its subsidiaries and is a mid-cap IT
firm listed on NASDAQ and has it’s headquartered in Fremont, California, USA. Its
flagship company iGate Global Solutions, founded by Sunil Wadhwani and Ashok
Trivedi, is based in Bangalore, India. The company offers applications development and
maintenance, business interchange intelligence, ERP, data warehousing and BPO services.
At the time of acquisition, it was the first Business Outcomes driven integrated
Technology and Operations (iTOPS) solutions provider with a global delivery model.
Amongst its customers include companies in insurance & healthcare; life sciences;
banking & financial services; manufacturing, media, entertainment, communication, retail,
distribution & logistics, energy & utilities, leisure & travel and independent software
vendors across the Europe- Middle East-Africa (EMEA), Americas and Asia-Pacific.

As of December 31, 2013, the employee strength of the firm stood at 29,733 employees
with an addition of 1,450. During the year ended December 31, 2013, the revenue
increased by 7.17% to $1.1509 billion, however the net income increased by 35.5% from
$95.8 million to $129.8 million. The diluted earnings per share were$1.21 as compared to
$0.85 for the year ended December 31, 2012. Tables 2 and 3 present iGATE Corporation
income statement and balance sheet.
 Table 2: Consolidated Income Statement of iGATE Corp. (Amount in
thousands)
Year Ended December
31

2013 ($) 2012 ($) 2011 ($)

Revenues 1,150,925 1,073,930 779,646

Cost of revenues (a) 698,232 649,910 483,504

Gross margin 452,693 424,120 296,142

Selling, general & administrative expenses 190,261 171,471 151,497

Depreciation & amortization 35,189 46,382 38,735

Income from operations 227,243 206,267 109,910

Interest expense (85,579) (83,766) (50,608)

Foreign exchange gain (loss), net (4,099) (20,084) (13,076)

Other income, net 44,645 28,491 15,894

Income before income taxes 180,210 130,908 84,272

Income tax expense (b) 50,229 30,599 24,218

Net income 129,981 100,309 60,054

 Non-controlling interest 209 4,476 8,586

Net income attributable to iGATE Corporation 129,772 95,833 51,468

Accretion to preferred stock (c) 494 404 302

Preferred dividend 31,403 29,047 22,147

Net income attributable to iGATE common

shareholders 97,875 66,382 29,019

Source: iGATE Corporation Annual Reports

(a) Cost of revenues is exclusive of depreciation and amortization.

(b) As the effective tax rate is a better comparable measure, the percent change from
comparable period is not computed.
(c) The percent is insignificant

Note:
1) Financial highlights for the year 2010 (Amount in thousands): Revenues = $280,600.
Gross Profit = $112,690. Income from operations = $53,012. Net income to equity
shareholders = $51,760. Other income = $1,492.
2) iGATE Computer (now merged with iGATE Global), results are consolidated for a
period of 231 days with effect from May 15, 2011 for the year ended December 31,
2011 as compared to the full period for the year ended December 31, 2012 and 2013.
This accounts for the major variances in the comparison of results for the year end of
December 31, 2012 with 2011.
3) Diluted EPS are $1.21, $.85, $0.38 and $0.90 for the year ended December 31, 2013,
2012, 2011and 2010 respectively.
Table 3: Consolidated Balance Sheet of iGATE Corp. (Amounts in thousands)
Dec.31, 2013 Dec.31, 2012
ASSETS ($) ($)

Cash and cash equivalents 204,836 95,155

Restricted cash 360,000 3,072

Short-term investments 181,401 510,816

Accounts receivable, net 157,905 162,335

Unbilled revenues 61,424 72,901

Prepaid expenses and other current assets 44,492 31,710

Prepaid income taxes 838 8,541

Deferred tax assets 10,235 14,655

Foreign exchange derivative contracts 836 782

Receivable from related parties 4,046 0

Total current assets 1,026,013 899,967

Property and equipment, net 165,581 167,252

Leasehold land 76,732 86,933

Goodwill 438,891 493,141

Intangible assets, net 119,262 144,428

Other assets 72,243 84,538

Total assets 1,898,722 1,876,079

LIABILITIES

Accounts payable 9268 7799

Line of credit 52,000 77,000

Senior notes 360,000 0

Term loans 90,000 35,000

Accrued payroll and related costs 57,093 54,802

Other current liabilities 104,272 113,548

Total current liabilities 672,673 288,149

Senior Notes 410,000 770,000

Term loans 270,000 263,500

Other long-term liabilities 59,185 76,031

Total liabilities 1,411,818 1,397,680

Preferred stock 410,371 378,474

Shareholders’ equity 76,533 67,503

 Total liabilities 1,898,722 1,876,079

Source: iGATE Corporation Annual Reports

Note:
1) Total Assets as on 31st December 2011 and 2010 are $1,714,572 and $305,043
respectively.
2) Shareholder’s Equity as on 31st December 2011 and 2010 are $77,000 and
$248,056 respectively.

Patni Computer Systems

Patni Computer Systems Ltd., one of the oldest IT firm was conceptualized by an MIT
graduate in 1970s—Mr. Narendra Patni. It was the place where NR Narayan Murthy met
the other co-founders of Infosys. The country’s seventh-largest IT exporter was a leading
provider of high quality, reliable and cost-effective business solutions and information
technology services globally. It provided services in the areas of applications development
and maintenance interchange, product engineering, infrastructure management and
business process outsourcing (BPO). It had strong domain capabilities in banking &
financial services, insurance & healthcare, life sciences, manufacturing, telecom, product
engineering services, energy & utilities, media and entertainment industry, retail, logistics
and transportation. Table 4 present key profitability ratios of Patni Computer Systems till
31st December 2011 as the company got delisted from the stock exchange and merged
with iGATE in the year 2012.
 Table 4: Key Profitability Ratios of Patni Computer Systems Ltd
December December December December
2011 2010 2009 2008

OPM (%) 26.43 31.54 35.23 31.58

NPM (%) 22.51 33.06 30.06 24.19

ROCE (%) 15.59 20.03 18.39 18.49

RONW (%) 14.84 22.25 17.00 15.43

Source: Prowess

Takeover Bid

Several companies were at loggerheads to acquire the control of PCS. iGate was not the
only firm in the race. Japanese players NTT Docomo & Fujitsu along with private equity
funds Carlyle and Advent International were also keen to pick up stake in the firm, along
with NASDAQ listed iGate, which was backed by the private equity firm Apax Partners
LLP. But the contest for Patni Computer Systems narrowed to two suitors — iGate-Apax
Partners and the Carlyle-Advent International consortia.

Carlyle-Advent submitted an offer of Rs.600 for each share ahead of iGate. But the bid
was also accompanied by unbending conditions as the offer was dependent on several
terms, including a non-compete clause that restricted the promoters, the three Patni
brothers, from doing the same business and a clause providing for a lower bid price in case
of any liabilities discovered at a later stage. However, Advent International wanted to offer
a lower price for the Indian software company and therefore, later on it withdrew from the
bidding process. Thereafter, Carlyle Group went alone to bid for a controlling stake in
Patni Computer. Finally, the iGate offer of Rs.503.5 per equity share was accepted by the
promoter’s as the same was without any conditions attached especially the non-compete
clause.

Regulatory Issues

Since the acquisition resulted in more than 15% of the share capital of Patni Computer,
the open offer of 20% to public shareholders of Patni Computer as mandated under SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The offer was
managed by Kotak Mahindra Capital. The approval of RBI and US based anti-trust
approvals, rules of U.S.S.E.A of 1934 and regulations of USSEC were sought for the open
offer, as more than 15% of shares of Patni computers were being acquired. But SEBI had
opposed to the delisting after the open offer because the successful open offer may have
resulted in shareholding of the acquirers along with persons acting in concert reaching
around 83%. The regulator however cleared the open offer after the acquirer gave a
commitment that it will not delist Patni Computer without bringing down its stake to 75%.

Valuation, Payment and Financing

Valuation of the target in an acquisition is a vital part of the process of determining the
consideration to be offered to the target shareholders. The value of the target from the
bidder’s point of view is the sum of the pre-bid standalone value of the target and the
incremental value the bidder expects to add to the target’s assets. The latter may arise from
improved operation of the target or synergy between two companies. The valuation of
Patni Computer shares fixed at Rs.503.5 was determined using discounted cash flow
approach and the payment was in the form of cash to the shareholders. At the time of
acquisition, the Patni’s price/earnings was 9.4 based on the trailing four quarter earnings.
Table 5 presents the price/earnings (P/E), price/book value (P/B), and price/sales (P/S)
ratios of Patni Computer, Tata Consultancy Services (TCS), WIPRO, Infosys and IT
industry.
 Table 5: Price/Earning, Price/Book Value and Price/Sales multiples of Patni
Computer, top three IT companies and IT industry
WIP Infos
Year Patni TCS RO ys Industry

P/E P/B P/S P/E P/B P/S P/E P/B P/S P/E P/B P/S P/E P/B

03- 12. 2.3 12.0 2.8 1.6 13.0

2009 4.47 0.63 1.07 37 3.96 6 9 7 6 3 4.26 3.74 10.83 2.60

03- 27. 6.6 21.1 5.8 4.5 25.9

2010 12.58 2.06 3.99 20 10.18 3 9 7 1 0 6.81 7.10 23.40 5.32

03- 30. 7.9 24.2 5.5 4.4 28.8

2011 9.61 2.02 3.37 57 11.88 1 4 1 5 4 7.58 7.32 25.47 5.59

03- 21. 7.8 23.1 4.1 4.0 22.1 21.0

2012 - - - 63 8.19 1 1 3 9 1 5.45 6.48 3 4.38

03- 24. 8.0 19.7 3.7 3.3 17.3 20.9

2013 - - - 95 8.91 7 2 8 9 4 4.54 5.31 5 4.46

Source: Prowess

Note: The data of Patni Computer after 2011 is not available as the company got
delisted.

The EPS, BVPS (Book Value per Share) and SPS (Sales per Share) as on 31st December,
2011 are Rs.37.16, Rs.251.36 and Rs.159.98 respectively.
 Three banks namely, Standard Chartered Bank, Duetsche Bank and Barclays, funded
the leverage buyout of Patni Computers through funds raised by 9% high yield bonds to
the tune of $770mn.The remaining $330 million of the $1.2 billion deal was raised by
issuing convertible preferred stock to Apax Partners, the private equity firm with which it
formed a consortium to make this acquisition and the balance by cash.

Delisting

Patni Computer Systems faded away on May 7, 2012, 34 years after it came into being
when US-based Company got away with the Patni appendage. The main reason was to
disassociate with the family name, Patni, as it could have been used by any family member
of Patni to start a new competing firm. The voluntary de-listing process started after
getting approval from the minority shareholders. In accordance to SEBI regulations, the
reverse book building process was initiated to come up with the delisting price of Rs.520
each share. Several big shareholders like Elliott Management, a New York based hedge
fund sold their shares at the delisting price, subsequent to which the shares of Patni
Computer Systems were removed from trading on the Bombay Stock Exchange and
National Stock Exchange (NSE) with effect from May 14 and May 21, 2012 respectively
under SEBI (Delisting of Equity Shares) Regulations, 2009. In addition, the NSE also
decided to exclude Patni’s scrip from CNX 200, S&P CNX 500 Index, CNX Small cap
Index and CNX IT Index.

The complete de-listing process costed $272 million to iGate, which was financed by a
loan of $265 million from DBS and the balance $7mn came from internal accruals. The
whole process of acquisition and delisting increased the debt burden to about $1billion
with an interest liability of around $90 million each year.
Sources of Value Creation/Synergy

The acquisition of Patni Computers and its subsequent delisting and merger with iGate
is in the nature of a horizontal merger. The sources of value creation in horizontal mergers
can be derived through:

• Enhancement of revenue while maintaining the existing cost base.

• Cost reduction while maintaining the existing revenue level.
• Generation of new resources, capabilities, products, markets and processes that
lead to revenue growth or cost reduction.

Post integration, Patni will benefit by getting access to fast growing verticals like
B&FS & iGate will get the benefit of large scale of Patni computers.

Since the major demand comes from banking and finance vertical and the limited
exposure of Patni, just over 11percent share in the total revenue, could be one of the
causes for a slump in its revenue growth and operating profit margin in the year 2010 and
2011. Companies that had thrust in banking and financial services clocked higher growth.
iGate was part of it with half of its revenue coming from this fast-growing sector. After the
integration, Patni will be able to take benefit of iGate’s thrust in this sector. Also, the
opportunity of cross-selling each other’s products become a reality.

Rationale behind the Acquisition

The acquisition will help iGate to remove its tag of being a smaller organization and
take a leap into the higher league of Indian IT industry more so, when a minimum level of
USD 1billion in revenues has become a sort of pre requisites to participate in larger deals.
The rationale behind the acquisition is the synergies in the competencies and skill sets.
iGate had a professional staff of process, domain and operational consultants and Patni
had excellent technical capabilities and strong micro-domain knowledge – the
understanding of sub-segments within a vertical.
Post-Acquisition Integration Strategy

The strategy for post-acquisition integration started even before the completion of the
deal by drawing a plan for the smooth merger of both companies focussing on go-to-
market strategy so as to realize the benefits of synergy. Being a cross-border transaction,
the main issue was the integration of companies from different geographies and employees
(Patni Computers had three times the number of employees as iGATE). In this type of
merger, the top parameters set to gauge the success of the merger were customer retention,
reducing attrition and being margin accretive. Both iGate and Patni formed an ‘integration
project management office’ within their organization and a common steering committee to
supervise and expedite the integration process. Five members from each company formed
the common steering committee. The main responsibility of the steering committee was to
set goals, targets and time-lines and evolve tools for solving serious problems. Deloitte
was appointed as advisor to smoothen the integration process, whereas Mercer was
appointed to take care of human resource angle. In this acquisition there were many
challenges to handle like how to harmonize both sales and delivery and present one face to
the client.

The integration of iGate and Patni Computer Systems saw the change in the leadership
team with new leaders making their way. The existing Patni CEO Jeya Kumar was
replaced by Phaneesh Murthy as chairman and CEO of Patni. Patni’s chief human
resource officer, Steve Correa made way for iGate’s HR head, Srinivas Kandula as the
source of synergies were thought to come from integration of support functions such as
HR, finance and legal between both the companies. The fast pace of integration saw
Murthy’s team had already and successfully integrated the sales forces of both the
companies, ahead of delisting, and all the new deals were being taken on iGate’s books
with work being shared with Patni later through transfer pricing.

Regarding the integration of operations, a joint iGate-Patni team came together shortly
after the acquisition took effect to resolve how to manage the operations.
 They jointly accepted the following propositions:

• The two companies would work as an integrated team instead of separate entities.
• Although there might be different insights; synchronization is important and
everyone should be on the same page with respect to the understanding of
problems and their solutions.
• Solution leaders should have the ability to hire people with right qualities and
calibre.
• The right metrics need to be established to workout development designs,
processes and operations as soon as possible.
• A “three in a box” model should be set up to facilitate solutions development
where every solution has to be examined and supported by a Solutions Leader,
Delivery Leader and Sales Leader.

The improved framework in two parts—offering new solutions and other investments;
and develop solutions according to the market requirements.

There can be several learnings from the integration experience of iGate and Patni:

1. Proper synchronization process from the beginning could have ensured smooth
implementation of solutions development process.
2. Too many solutions in the combined portfolio spoilt the broth and sales team could
not focus on any one of them properly.
3. The whole organization was focused on creating value proposition for customers.
 Conclusion

Acquisition of one of India’s oldest IT firms, boosted California based iGate to the
higher league of Indian IT industry. In the year 2013, the company has set another
ambitious target for itself. It wants to increase its revenue to $ 3 billion by 2017 from $1
billion now, of which 30 per cent will be contributed by its outcome-based model or
billing clients only for the final product and not the effort in developing a product. This is
quite challenging as the growth target means iGate will have to more than double its
revenue in the next four years, at a time when industry growth has tapered to 13-14
percent. Achieving this target is not possible without another acquisition. Some of the
analysts point out that the iGate-Patni deal has been an operational story in terms of
integration and not a growth one.

The road for iGate, post exit of Phaneesh Murthy as CEO due to his involvement in a
sexual harassment case, is going to be tough as he led the company for over a decade,
spearheaded its sales and moved the company to an outcome-based payment model geared
towards attracting increasingly tight-fisted customers.