US mid-size outsourcer iGate is to acquire a majority stake in Patni Computer Systems, a larger Indian mid-size outsourcer, reflecting the need for smaller outsourcers to merge and become larger to compete.
iGate, backed by private equity firm Apax Partners, is paying $921 million for a 63 percent share of Patni, a company listed in India. The share is currently held by the founders of the company and the private equity firm General Atlantic.
Under Indian government rules, iGate is obligated to offer to buy another 20.6 percent of Patni from the company's ordinary shareholders for an estimated $301 million.
Scale has become very important to compete in the outsourcing business, as customers are trying to consolidate their suppliers to a few that have the size and the ability to offer a variety of services, said Jimit Arora, research director at Everest Group. In the IT service industry, size and scale matters a lot to win large deals, said Arup Roy, a senior research analyst at Gartner, in a statement.
The need for scale is driving mid-size outsourcers, typically defined with revenues of less than $1 billion a year, to consolidate, Arora said.
iGate said on Monday that the acquisition will allow it to compete for larger deals in more industry verticals. The deal would also mean more efficiencies in operations and delivery of services.
The acquisition of Patni by iGate will not change the competitive landscape in the outsourcing business, analysts said. The total revenue of the two companies was just over $941 million for the 12 months ending September 30 last year. Together, both companies have about 24,800 employees.
After the acquisition iGate will still be a mid-size company, far smaller than some of India’s top outsourcers, said Sudin Apte, principal analyst and CEO of Offshore Insights.
India’s largest outsourcer, Tata Consultancy Services, had revenue of $6.34 billion for the fiscal year ended March 31 last year.
Mid-size outsourcers have to either differentiate by creating specialised practices or domain expertise, or compete with the big players in terms of size, Apte said. Both Patni and iGate do not have services that differentiate them significantly from the larger Indian outsourcers, according to Apte.
Together the companies will still be far too small to compete with the larger players, he added.
In a survey of 25 Patni customers, Apte found that Patni was not a strategic partner for these customers who had other suppliers in India. Many of these customers may shift to other suppliers if the company spends too much time on the integration and neglects new investment in services, Apte said.
It is naive to expect all the business from Patni to move to iGate, Apte said. The combined company may however benefit from new business from companies in the portfolio of Apax Partners, Apte said.
The transaction is expected to be completed by June, iGate said. Viscaria Limited, a company backed by funds advised by Apax Partners, will invest in iGate in order to facilitate the acquisition of a majority stake in Patni. iGate will borrow $700 million for the acquisition.