With the Patni acquisition, iGate’s Phaneesh Murthy has returned to the billion-dollar game in software outsourcing. To make it work, he will have to find his old touch — quickly
In December, Phaneesh Murthy went on a holiday to Hawaii. It was an opportunity not just for a soul recharge, but also to conquer a long-standing fear of heights. So there he was trying to jump off a 35-foot cliff. As he approached the edge he found himself scared to death. “Everyone was screaming ‘jump, jump’ but I couldn’t do it,” he says. For a while, he stood frozen. And then a moment arrived when he chewed up his fear and just jumped. “The willingness to take that plunge was higher than my fear,” says Murthy.
In his professional life, Murthy is yet to make a landing after his career leapt off a cliff in 2002. This was after he had to leave Infosys unceremoniously, bearing the unpleasant charge of sexual harassment. Many thought Murthy was finished. But soon, he got his second chance.
Sunil Wadhwani and Ashok Trivedi, founders and 46 percent owners of iGate, a software firm that was bleeding after the dotcom bust, asked him to come in as CEO and revive it. Murthy promised a few things. He would take the operating profit margins of the company from negative territory to 20 percent. Similarly, he would boost the return on equity, and help increase the market capitalisation to a billion dollars (for which he was promised a Lamborghini). True to his word, Murthy achieved all the three within seven years. With the company, his career has also turned around. The one pending item on Murthy’s agenda, however, was raising the turnover of iGate to $1 billion by 2010 as he had promised the founders.
He had been trying to figure a way to do this for a while. When the Satyam scandal broke, iGate was one of the companies that showed an initial interest to acquire the beleaguered company. But Murthy decided against bidding because of a lack of clarity on financial risks and also iGate’s paucity of funds. Keane, another potential target, ended up in the hands of NTT last year. Murthy has known for a while that size matters in this industry. No matter how hard he tries, there is only so much charisma that can be attributed to the CEO of a $300 million company.
So, few were surprised when iGate acquired a 63 percent stake in Patni Computers, by paying $921 million to its four promoters. An open offer to the public shareholders of Patni for another 20 percent stake will take the total cost of the acquisition to $1.2 billion. With revenues of close to a billion dollars ($940 million annualised as of September 30, 2010) and a total workforce of 25,000, the iGate-Patni combine will become the country’s tenth largest IT services operation by size. To finance the deal, iGate will take on debt of $750 million but with the combined operating cash flow of about $185 million per year, debt servicing should not be an issue.
Messy and Complex
Yet, there are people who scoff at what Murthy has done. His critics think he has just bought himself some revenues through a ‘financial engineering deal’ and that Murthy is doing this to create a larger balance sheet and drive up the market cap.
Murthy says the deal is not about him or his ego. “I am not taking on this messy and complex transaction because I want to prove something,” he says. As far as market cap goes, he does agree that while there will be pain in the short term (iGate’s stock has lost a third of its value since the announcement), the deal will be good for all stakeholders in the long term. “It’s the fastest way to get to $50 share price.” (The company’s share price now hovers just above $16.)
But what’s with the billion dollar size? “The biggest risk was in staying where we were,” says Ashok Trivedi, co-chairman. “The industry is sceptical about mid-sized players. As a smaller player, we are prevented from running certain races. A billion dollars will qualify us for the larger deals” he says.
Trivedi is right. Today the only Indian IT services companies that are globally competitive are the large companies: Tata Consultancy, Infosys, Cognizant, HCL and Wipro. Everyone else is struggling. Specialist companies like Sasken or Aztec have found that their focussed approach hasn’t yet yielded results and the small companies like Mastek and Polaris are finding it tough going.
One key reason is that big US companies are now handing out big contracts. These contracts are worth $50 million to $100 million a year in revenue for the IT services companies. But there’s a catch. The US companies don’t want the revenue from their contracts to be more than 10 percent of a service provider’s overall revenue. There are exceptions, but this is typically their way of reducing risk. So if iGate wants to aim for $100 million-a-year deals, it needs a billion dollars in revenues, which is exactly what the Patni acquisition gives.
But iGate has only $100 million of cash and Patni’s asking price was above a billion dollars. “It is like buying a Ferrari car on your credit card,” says iGate’s chief financial officer Sujit Sircar. Hence, Murthy teamed up with PE investors Apax Partners, which had looked at Patni as far back as 2007. “We have looked at every sizeable deal in this space,” says Shashank Singh, co-lead at Apax India. “Phaneesh and his team are the strongest management team that we have found.”
(This story appears in the 11 February, 2011 issue of Forbes India. To visit our Archives, click here.)