Patni Computers: Is the marriage with iGate really worth it?

Patni Computers is one of the first IT companies to start business in India. While the ones like Infosys, TCS & Wipro, which started at the same time or later have grown quickly into multi-billion dollar businesses, Patni is yet to reach the one billion dollar mark. The reasons are obvious. The promoters were never really serious in growing the business either organically or inorganically. For the last few years, it has been on the block and finally, it looks like Patni has found a suitor in the consortium led by iGate (or is it really APAX partners?). Is this partnership good for Patni in the long run? May be.

In a typical M&A deal, three things matter for the deal to succeed,

1. The company being bought either has a business of complementary nature or helps the buyer to add scale: Patni is helping iGate in only adding scale. In return, Patni is getting aggressive management which was the only ingredient impeding Patni's growth so far.

2. The company work cultures are compatible: On this front, I don't see too much of a problem either since both of them have not reached a size to be called full-fledged IT service providers in the league of TCS & Wipro. I would classify both of them to be operating at the low end of the value chain.

3. Timing: In my view, this is very important. After Tata Steel bought Corus, the steel cycle turned negative and without the deep pockets of the Tatas, it would have been a disaster. In this aspect, if we hit another 2008-kind of situation in the near future, the deal will mean trouble for both iGate & Patni since the PE players will not keep throwing money, but may want to sell off the company in bits & pieces & exit. In this aspect, someone like Fujitsu would have been a better fit for Patni.

Now that iGate has pulled off the deal, it has to focus on completing the formalities quickly and start getting into the details.Here is how I think iGate can make this deal work:

1. Pay enough attention on employee integration, especially retaining key employees.

2. Focus on retaining key customers of Patni. This should not be an issue given the fact that long-term IT contracts are not cancelled /transferred just because of top management change. But the new management must spend time to assure them that they are in safe hands. Phaneesh has a very tough task ahead on this front.

3. Keep a tab on the cash-flow. This may look like a no-brainer for an IT services company. But any serious issue on this front can get the merged company into a lot of trouble. With both iGate & Patni being highly leveraged because of this merger and the presence of a PE player with a significant stake in the merged entity, Phaneesh should tread carefully.

As things stand now, it looks like Phaneesh may just be able to pull it off.