babu banarasi das university

2019-20
CORPORATE RESTRUCTURING & BUSINESS VALUATION

A case study on
“merger and acquisition of
Idea – Vodafone”
Submitted To: Submitted By:
Dr. Vinitendra Singh Shivani Rai
MBA 22
1180672130

“Case study 1”
Acquisition of Patni by iGate On January 10, 2011, US-based iGate Corporation (iGate)
(NASDAQ:IGTE) announced the acquisition of Patni Computers Limited (Patni) (BSE: 532517)
(NSE: PATNI) (NYSE:PTI), the IT services and BPO company based in Mumbai, India. On this
occasion, Phaneesh Murthy (Phaneesh), Chief Executive Officer (CEO) of iGATE, said, “The
objective is to synergize the leadership team of both iGATE and Patni to create, over time, a
worldclass integrated leadership team which will drive the combined company to newer
horizons.” Commenting on the deal, Arup Roy (Roy), Senior Research Analyst, Gartner Inc.
(Gartner), said. “It is a better deal for iGate, since the combined entity will be worth almost a
billion dollars, which can help swing large deals in its favor.”

Patni’s Promoters and General Atlantic had made several efforts to sell their equity in the
company. According to experts, a number of IT players including Larsen & Toubro, IBM, NTT
Data Corporation (NTT), and Fujitsu Limited (Fujitsu) as well as private equity players such as
Apax Partners LLP (Apax), Texas Pacific Group (TPG), and Blackstone Group L.P. had shown
an interest in Patni at different points of time.

Try to Understand

 The various issues and challenges in Merger and Acquisition (M&A)

 The synergies and challenges of the acquisition
 The various financing methods of any acquisitions 
 The rationale behind the acquisition 
 The human resource issues involved in any acquisition of an IT company
 The role of various parties involved in M&A activities

ANSWER
• The synergies and challenges of the acquisition
SOURCES OF VALUE 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 synergy 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.

• The various financing methods of any

acquisitions
1. Stock Swap Transaction

When companies own stock that is traded publicly, the acquirer can exchange its stock with the
target company. Stock swaps are common for private companies, whereby the owner of the
target company wants to retain a portion of the stake in the combined company since they will
likely remain actively involved in the operation of the business. The acquiring company often
relies on the proficiency of the owner of the target firm to operate effectively.

Careful stock valuation is important when considering a stock swap for private companies. There
are various stock valuation methodologies used by proficient merchant bankers, such as
Comparative Company Analysis, DCF Valuation Analysis, and Comparative Transaction
Valuation Analysis.

2. Acquisition through Equity

In acquisition finance, equity is the most expensive form of capital. Equity financing is often
desirable by acquiring companies that target companies that operate in unstable industries and
with unsteady free cash flows. Acquisition financing is also more flexible, due to the absence of
commitment for periodic payments.

3. Cash Acquisition

In an all-cash acquisition deal, shares are usually swapped for cash. The equity portion of the
balance sheet of the parent company remains the same. Cash transactions during an acquisition
often happen in situations where the company being acquired is smaller and with lower cash
reserves than the acquirer.

4. Acquisition Through Debt

Debt financing is one of the favorite ways of financing acquisitions. Most companies either lack
the capacity to pay out of cash or their balance sheets won’t allow it. Debt is also considered the
most inexpensive method of financing an acquisition and comes in numerous forms. When
providing funds for an acquisition, the bank usually analyzes the target company’s projected cash
flow, profit margins, and liabilities. Analysis of the financial health of both the acquiring
company and the target company is a pre-requisite.

Asset-backed financing is a method of debt financing where banks can lend funds based on the
collateral offered by the target company. Collateral may include fixed assets, receivables,
intellectual property, and inventory. Debt financing also commonly offers tax advantages.

5. Acquisition through Mezzanine or Quasi Debt

Mezzanine or quasi-debt is an integrated form of financing that includes both equity and debt
features. It usually comes with an option of being converted to equity. Mezzanine financing is
suitable for target companies with a strong balance sheet and steady profitability. Flexibility
makes mezzanine financing appealing.

6. Leveraged Buyout

A leveraged buyout is a unique mix of both equity and debt that is used to finance an acquisition.
It is one of the most popular acquisition finance structures. In an LBO, the assets of both the
acquiring company and target company are considered as secured collateral.

Companies that involve themselves in LBO transactions are usually mature, possess a strong
asset base, generate consistent and strong operating cash flows, and have few capital
requirements. The principal idea behind a leveraged buyout is to compel companies to yield
steady free cash flows capable of financing the debt taken on to acquire them.

7. Seller’s Financing / Vendor Take-Back Loan (VTB)

Seller’s financing is where the acquiring company’s source of acquisition financing is internal,
within the deal, coming from the target company. Buyers usually resort to the seller’s financing
method when obtaining capital from outside is difficult. The financing may be through delayed
payments, seller note, earn-outs, etc.

• The 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 1billionin
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.

• The human resource issues involved in any

acquisition of an IT company
Some of the human resource issues involved in an acquisition are:

a) Identifying and communicating the reasons for the M&A to employees. Often
employees see change as dislocating and upsetting. HR must communicate effectively
and openly with all employees throughout the transition. Specifically, HR must
communicate with employees about the necessity for the change, explain how the change
will benefit them, and manage the stresses that accompany change.
b) Forming an M&A team and choosing and coaching an M&A leader. The team leader
must focus solely on the M&A rather than be involved in running the business, be
sensitive to cultural differences, lead the change process, and retain and motivate key
employees.
c) Assessing the corporate cultures. One company may be driven by a sales mentality
while another may be focused on innovation. Or decisions in one company may be top
down while the other may be used to more participative decision making. HR must
anticipate cultural challenges and take steps to integrate the two cultures.
d) Deciding who stays and who goes. HR must determine the new organizational structure,
and retain and motivate key talent. Our workforce planning template can help you better
assess this issue. Download it here.
e) Comparing benefits, compensation and union contracts and deciding on HR policies
and practices.
 Conclusion
Reliance Jio is the threat to most of the companies in telecommunication industry
and to survive in this cut throat competition mergers and acquisitions is seen taking
place in industry. In the present case of Vodafone-idea it can be said that Synergy
benefits would gradually be achieved in coming years which will result in higher
profits and leverage is expected to reduce hence resulting in value addition to
shareholder. As of now there is no gain to public shareholder, it is a loss making
company posting a loss of Rs 5003 crore loss in the December quarter.