As if he didn't have enough on his plate already following his rapid rise to HfS fame and glory, we sent Esteban Herrera to mingle with the elite of iGate and Patni to take a closer inspection of the first billion-dollar sourcing marriage of 2011...
At one point, there were over 200 investor-backed ITES providers in India. Today there is one less, as iGate has entered in an agreement acquire a majority stake in Patni. The world does not need 200 ITES outsourcing companies in India, so on that level this is a good thing.
In fact, as mergers go this is a fairly synergistic one: a high-growth, innovative company acquires a bigger but staid, stuck competitor. The vertical strengths of the two companies have little overlap, and the two companies together will sell a respectable billion dollars, giving them some clout in this hyper-fragmented market.
That said, a billion dollars ceased to be a big deal in this market about six or seven years ago, so like much of the other M&A activity we are seeing, this feels like too little too late. iGate has been making the right noises for some time, with outcomes-based pricing and combined BPO/ITO offerings, but one has to wonder why it hasn’t made even more of an impact—if those two characteristics alone are real, they should be eating the lunch of their larger competitors who don’t know how to spell risk and could not break down their organizational silos with a battering ram. But they aren’t. To be sure, adding Patni’s 16,000 or so employees will add scale, but everyone knows that’s not what makes a merger work.
A significant source of concern is the Achilles heel of all acquisitions—will the cultures fit? If you listened to the two company’s calls to brief analysts, it was hard to believe they had actually spoken to each other during the process. Then, this nugget from Patni: “Management, as you know, was not involved in the transaction.” Say what? It appears Patni’s owners and investors pulled the rug out from under their management team, and the mood was palpable even through the phone line. On paper and in principle, this acquisition makes a lot of sense, but execution is what separates the successes from the abysmal failures, and the Day 1 coordination does leave something to be desired. Printed materials and Patni suggest that it will be run as an independent P&L within iGate, but the message from the iGate folks was integration all the way. HfS Research is still wondering why the two companies even had separate calls.
In typical HfS Research style, let’s take a quick look at what this means to the various impacted constituencies:
iGate's customers will generally benefit from a more disciplined delivery method espoused by Patni. Patni customers may well take advantage of iGate’s more innovative commercial models to transfer some risk and better align goals. This is all dependent, however, on the delivery teams from both sides being willing to work with each other, teaching, coaching, and knowing when to hold back. If you are a dissatisfied Patni customer (and we don’t know many), this is, of course, an opportunity to trigger your change of control clause.
Patni’s founders and General Atlantic had a decent day. $1.22 billion is not a huge multiple, but given that Patni had its “For Sale” sign out longer than a Nevada foreclosure, it was to be expected. iGate suddenly finds themselves in the world of leveraged buyouts—perhaps not where they intended to be. Debt changes a company’s behavior and iGate is going from having almost none to speak of, to carrying a large burden. There is nothing wrong with debt per se, but management of debt-ridden companies requires a different skillset than managing cash cows. Similarly, investing in leveraged companies requires a different stomach than investing in pristine balance sheets.
Patni employees can be heard breathing a huge sigh of relief—two plus years of uncertainty have ended. And except for those in the redundant functions (a decided minority) they appear to have pretty good job security post-transaction. iGate has cultivated a decent employer brand and will likely bring some energy and enthusiasm to the ranks of Patni, but it would be unreasonable not to expect turf wars and resentment, especially amongst long-term employees on either side who see themselves as “losing” in the transaction.
Overall, this is a synergistic, common-sense transaction and HfS hopes the combined entity will make a bigger dent in the marketplace, especially with innovative commercial models that better match risk and reward and simplify end-to-end services. At the same time, we doubt that this acquisition is sending shivers of fear into any of the larger competitors. We’ll be monitoring the situation and keeping our readers apprised.