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‘Everyone Has Been Supportive At Patni’

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On 10 January, Monday , ending months of speculation, Nasdaq-listed iGate Corporation acquired Mumbai-based Patni Computer Systems. The deal creates a $1-billion revenue entity with a combined workforce of 25,000 spread across multiple offshore delivery locations including Bangalore, Mumbai and Pune.

The deal also brings to an end a long period of uncertainty for Patni, whose owners, including private equity firm General Atlantic Partners, had been trying to sell their stake for over three years. But having bought a company more than double its size, iGate faces a challenging integration process. Phaneesh Murthy, iGate's 46-year old president and chief executive officer, spoke to Businessworld's Snigdha Sengupta at iGate's India headquarters in Bangalore on how he is going to play the next five years. Excerpts:

How important was this acquisition for iGate Corporation?
It represented the last real shot at getting quickly to the $1-billion revenue target. I still think that differentiation is significantly more important than scale. Having said that, scale was important for iGate's employees to compete effectively and not take on companies that are 20-25 times our size. Now, it is 4-5 times. That changes marketplace equations a lot.

Could you take us through the deal structure?
It is such that iGate is buying out the four primary shareholders for roughly about $922 million. In addition, we will make an open offer for 20 per cent, which if fully subscribed will cost us about $300 million. So, we will need about $1.2-1.25 billion. We have to raise that capital because we have only $135 million cash on our balance sheet.

Therefore, we are using $100 million of our own cash and raising $700 million in debt. The balance money is being taken through convertible preferred participatory equity from private equity (PE) firm Apax Partners. The balance money is a loose figure now. It could vary between $270 million and $480 million depending on how much of the open offer will be subscribed.

What kind of a stake will Apax Partners end up with?
They will have roughly about, at maturity, between 27 per cent and 38 per cent of the company depending on the amount of money we take from them.

What has Apax's role been in the making of this deal? Why did you pick the PE firm?
One of the lessons that we took away from the Satyam Computer Services deal was that we had made a mistake (iGate lost out in the bid to acquire Satyam in 2009). We realised that when we signed up with a PE firm, they also had to do their own due diligence on iGate before backing us on any acquisition. And then they had to do a due diligence on Satyam.

We realised that we should have already had a soft agreement with a PE partner (before bidding for Satyam). We knew mergers and acquisitions (M&A) was going to be a strategy. So, this time, we started talking to PE firms much earlier. We found a cultural fit with Apax — all the language that we heard was very high partnership orientation. About nine months ago, Apax started a soft due diligence on iGate. Then, in September last year, General Atlantic Partners (GAP) came down to my office in Fremont and presented the idea for the Patni transaction. I spoke to Apax and they thought, as we did, that it was worth exploring. They had already looked at Patni once in 2007 and gave me the whole background. They said that they would go down this path (with iGate), but because of what happened in 2007, they did not have confidence that a deal would get done.

How involved will Apax be in the company?
They have one board seat. So, to that extent, their engagement goes beyond the debt guys. We will get power from their network. I do not anticipate that they will play a disproportionately active role in the company. PE firms usually help portfolio companies fix the governance process. Here, they are stepping into a governance process that is working.

Patni and iGate seem very different culturally. iGate has been growing very fast and Patni has been stagnating. How would that impact integration?
It is difficult to get a long-term tenant if you put your house up for sale. What are the two primary assets in a services business? It is the people and the customer contracts. People are going to find it very difficult to plan their careers in a company where they don't know what is going to happen. Patni has a significantly higher attrition than the industry average. I think that will settle down. iGate has been one of the top three employers for the past four years. Post acquisition, the ‘for sale' sign has come off. Now, we will take iGate's best employment practices and extend it across the combined entity.

We believe that barring some initial churn, the attrition rate will settle down to manageable and reasonable levels. Similarly, it is very difficult for customers when an outsourcing partner is going through both frequent leadership changes and a likely sale.
You used the word stagnation; I call it a holding pattern. The fact is that Patni, in effect, has been in a holding pattern, and the question now is whether the acquisition, which represents stability, is enough to take it out of the holding pattern. That is the determination we will make over the next few weeks as we meet employees. By my own estimates, and from what I hear about the employee town-halls that have been going on at Patni, everyone has been quite supportive and happy with the development. We are off to a slightly better start than I was expecting.

How are you approaching the integration process? What will be the big challenges?
The integration itself is in the go-to-market. Both teams are delivering and executing well. What are we trying to do with this deal? We are trying to make sure that our deal-win ratio goes up. That goes up when you are able to take combined strength and showcase to customers. We are hoping to take each other's services to each other's customers. And we are hoping to leverage off solutions that each of us has built in the marketplace.

If you look at all of these, they are market-side factors. The big advantage is that out of 25,000 people, there are probably 500-700 people in the market-side. When you look at it that way, the solid integration effort is really there. After that, there will be integration effort on the delivery side, but it can take time because nothing is broken. We do not need to fix anything because Patni and iGate have good delivery execution records, so no problems there. The complex piece will be the leadership team.

How are you approaching that piece?
iGate's philosophy, in terms of people, has always been very egalitarian. That means, if you look at the value in stock holdings, I get a little more than the next level, and so on. Even if you look at salaries, my salary versus people who report to me, the differences are not even double. Patni has a very different model — what I call the master-slave model. This means one or two people earn 10-20 times others. I believe this has created a fair amount of resentment within the company.

If that spills over to iGate, there will be even more resentment. So, the only way for effective integration to happen is that people (in the leadership team) realise what has happened, are willing to reengineer themselves and look for value over a longer period of time through stock.

From both leadership teams, you will find certain sets of people who are committed and hungry and who will think and contribute. I think that will become the new leadership team of the combined entity. There will be some, in our opinion, who are passengers and will continue to play a role, but may not be part of the leadership team. And there will be some who are non-interested and have encashed enough value, and see no reason to continue. This process will get sorted out over the next six months.

What kind of customers does the acquisition allow you to access?
It certainly helps us to get into most Fortune 500 companies. Size is not a limitation any more. It will also help us mine customers better. The top 10 customer accounts for iGate have been growing north of 25 per cent year-on-year. The top 10 Patni accounts have been growing at 1-2 per cent year-on-year. That is an account management issue. Once we establish overall better account management principles, we will get growth from those accounts. If I can take Patni's current 35 per cent gross margins to 40 per cent, I think it is huge value.

General Electric is a big customer for both companies. Are you concerned that the combined entity may have too much exposure to one client?
By the end of this year, we anticipate that the exposure to GE will be roughly 11-12 per cent. That is actually not bad, if you look at it from the perspective of a $1-billion revenue firm.

Certain analyst reports suggest that after acquisition, nearly 20 per cent of Patni's top customers could go over to other vendors. How do you react to that?
Those reports are completely baseless. Patni's execution record has been quite strong. If customers leave, it will not be because of an acquisition. It will be because of the attrition in the team.

Even now, if you look at Patni's business, there is a certain churn because of the existing attrition. If somebody has done research on this, I would like to see a formal research report. I would like to see who they have spoken to. When we did our own due diligence with Patni's customers, we asked them whether they had any concerns with Patni and whether the company could do some things better. The only concern that they had come up with was attrition.

You have hit the $1-billion revenue target a year ahead of schedule. What is the next big target for iGate?
We laid out the $1-billion target in 2005 as iGate 1.0. We are now officially closing that, and starting development towards what we are calling iGate 2.0. This is really about building shared services platforms, moving more aggressively towards outcome-based pricing, breaking the linearity between people and revenue, and building IP-based solutions.

2.0 will have a very strong component of partner alliances, and PE is one of those partners. At the end of its development, I would like iGate to be among the most profitable companies in the industry. Now, the goal is that the leadership teams of both companies meet and we commit ourselves to 2.0; we commit ourselves to a time-frame and then try to build the milestones.

Do you have a tentative time-frame in mind? Have you set any hard targets?
All developmental work will take at least five years. In 1.0, we had planned for seven years, but we did it in five. So 2.0 should take another five years. We have not put revenue goals yet on 2.0, but clearly our goal is to be more profitable, highest earnings growth and so on. That is what the teams have to sit down and decide. Why I am saying that is we have to judge the aspiration levels of the two teams — the hunger levels, all of that plays a significant role in setting targets.

How will the acquisition change the way you personally work?
I will obviously spend a lot more time in India. As you get older you want to create a team quickly and work with that team for a longer period of time. My focus is going to be to pick that team within the next six months and use that over the next five years. I will probably spend a little less time with customers and the marketplace and a lot more time with investors.

So, I will have to reduce the stuff that I really enjoy — the customer time. Now, I spend probably 50-60 per cent of my time with customers and another 10-15 per cent in brainstorming on solutions to take to market. I am concerned that percentage will drop for the next six months to a year.

(This story was published in Businessworld Issue Dated 24-01-2011)