iGates Patni buy on the rocks over valuation, non-compete disputes

Written by Rachana Khanzode | Goutam Das | Goutam Das | Bangalore/Mumbai | Updated: Jan 4 2011, 09:14am hrs
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The promoters of technology services firm Patni Computer Systems and the potential buyer consortium of iGate-Apax Partners are locked in a valuation dispute which now threatens to unravel the entire deal.

While iGate has offered Rs 530 per share, the Patni family wants Rs 560-570, sources close to the development said. However, negotiations are still on. On Monday, Patni shares closed at Rs 469 on the Bombay Stock Exchange, down 1.5%.

Other bottlenecks include the demand for a non-compete fee which iGate has refused and strategy road map after the merger while iGate offered a five-year road map, Patni reportedly wanted 10 years, sources said.

The non-compete provision bars promoters from entering a similar business for a certain amount of time. The buyer, in turn, is expected to shell out a non-compete premium, which would be 15-20% of the base bid price. Patni promoters have earlier refused non-compete pacts. This reportedly became a bone of contention with other bidders and was said to be one of the reasons why the heavyweight consortium of Carlyle, Advent International and Akansa Capital backed out.

The strategy plan, mentioned above, maps the service and leadership alignment after the acquisition and Patnis promoters reportedly want to ensure continuity for some of its senior employees with the firm for a long time, sources said. Analysts are expecting senior management retrenchment once the deal goes through.

The iGate consortium cancelled a scheduled press conference Monday where an announcement was expected. The consortium is planning to buy 63% in Patni.

The Patni brothers Narendra Patni, Ashok Patni and Gajendra Patni have been looking to exit for nearly two years now. Collectively, they hold 46% of the firm. General Atlantic, which bought into Patni in 2002 at Rs 133 a share, is expected to sell 17% of its holding.

Sources said Rs 570 a share would be over-valuing the firm. At over an estimated billion dollars, iGate would be paying a high price for a commodity player. They may not want to do that, a source said, adding that iGate would also be burdened with integration costs.

The cost of buying Patni is even more expensive when integration expenses are factored in. These would include process, work flow as well as cultural changes, the source said. Analysts said Patni should close the deal this time. If Patni misses out on this opportunity, it might have to settle for lower valuations next time, considering the firm has not been performing well, one analyst said. Typically and historically, the premium paid for a controlling stake is about 20-40%, depending on the performance of the company. However, Patni has almost had a stagnant top line over the last year, said an executive from a PE firm.

Besides, the compromise by Patni brothers and GA on valuation is clearly on the back of dividend of Rs 63 that the company paid through special cash, when the stock was ranging around Rs 470. The Patni brothers seem to have earned about Rs 378 crore with the dividend, another analyst added. While iGate reported revenues of around $230 million in the last 12 months, Patnis revenues were much higher at nearly $700 million. Patni also has 16,000 employees, double that of iGate. Analysts tracking the two companies indicated concerns over integration along with clients and employee retention. The two firms have different process-level maturity iGate, with a more globalised leadership team, has stronger processes and a culture of value-oriented thinking. Its sales aggressiveness is much higher. While iGate often competes with tier-one players, Patni is hardly the first choice of outsources, sources said.