CASE STUDY:

iGATE: THE MERGER WITH PATNI

COMPUTER SYSTEMS LTD.
INDIAN INFORMATION TECHNOLOGY SECTOR: AN
INTRODUCTION

India's IT Services industry was born in Mumbai in 1967 with the establishment of Tata Group
in partnership with Burroughs. The first software export zone SEEPZ was set up here way back
in 1973, the old avatar of the modern day IT park. More than 80 percent of the country's software
exports happened out of SEEPZ, Mumbai in 80s.

India is now one of the biggest IT capitals in the modern world. The economic effect of the
technologically inclined services sector in India—accounting for 40% of the country's GDP and
30% of export earnings as of 2006, while employing only 25% of its workforce

The share of IT (mainly software) in total exports increased from 1 percent in 1990 to 18 percent
in 2001. IT-enabled services such as back office operations, remote maintenance, accounting,
public call centers, medical transcription, insurance claims, and other bulk processing are rapidly
expanding. Indian companies such as HCL, TCS, Wipro, and Infosys may yet become household
names around the world.

India's IT industry (USD bn)

Particulars FY 2004 FY 2005 FY 2006 FY 2007 FY 2008

IT Services 10.4 13.5 17.8 23.5 31.0

- Exports 7.3 10.0 13.13 18.0 23.1

- Domestic 3.1 3.5 4.5 5.5 7.9

ITES-BPO 3.4 5.2 7.2 9.5 12.5

- Exports 3.1 4.6 6.3 8.4 10.9

- Domestic 0.3 0.6 0.9 1.1 1.6

Engineering 2.9 3.9 5.3 6.5 8.6

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 services, R&D
and Software
products

- Exports 2.5 3.1 4.0 4.9 6.4

- Domestic 0.4 0.7 1.3 1.6 2.4

Hardware 5.0 5.9 7.0 8.5 12.0

- Exports 0.5 0.5 0.6 0.5 0.5

- Domestic 4.4 5.1 6.5 8.0 11.5

Total IT industry
(including 21.6 28.4 37.4 48.0 64.
hardware)

PRESENCE OF IT IN INDIA
The Indian Information Technology industry accounts for a 5.19% of the country's GDP and
export earnings as of 2009, while providing employment to a significant number of its tertiary
sector workforce. More than 2.5 million people are employed in the sector either directly or
indirectly, making it one of the biggest job creators in India and a mainstay of the national
economy. In 2010-11, annual revenues from IT-BPO sector is estimated to have grown
over US$76 billion compared to China with $35.76 billion and Philippines with $8.85 billion.

Top eight IT hubs in India are Bangalore, Chennai, Hyderabad, NCR, Pune, Kolkata, Mumbai
and Cochin.

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TOP 10 IT COMPANIES IN INDIA
According to the market capitalization the top 10 IT companies in India are as follows:

Company Market Equity Sales Net profit EPS

capitalization
TCS 225,146.50 195.72 23044.45 5498.07 24.6
INFOSYS 177184.90 287.06 21140 5755 96.1
Tech.
WIPRO 105251.50 490.74 22922 4871.74 19.3
HCL 33200.68 136.91 5078.76 1049.51 14.7
technologies
ORACLE 18477.09 41.94 2243.47 661.62 78.9
Financial
Services
MphasiS 13840.17 209.97 3770.09 996.88 47.5

Tech Mahindra 7986.44 125.85 4483.80 742.8 58.4

Satyam 6929.59 235.3 5100.50 318.9 2.7
Computer
Patni 6127.90 26.3 1734.86 503.36 37.8
Computers
Polaris 1687.05 49.59 1143.48 130.64 12.6
Software

GOVERNMENT INITIATIVE IN IT SECTOR

The government of India has already set up a single-window facility for attracting foreign direct
investments in this sector.

Recognizing the potential of this sector, the government has provided many incentives including
a tax holiday up to 2010 and competitive duty structures. In addition to the central government
incentives, respective state governments have also developed attractive incentive packages to
target investors.

The government is also actively trying to reduce international communication cost. The
telecommunications ministry has already started phased liberalization programme.

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In order to support IT-related services, the government is providing some special incentives and
is also providing infrastructure support through organizations such as the Software Technology
Parks (STP).

Financial institutions and venture capitalists in the country are willing to provide funds at
competitive rates for expansion in ITes businesses.

All these factors collectively create a number of opportunities in the IT sector.

EXTERNAL ANALYSIS OF IT INDUSTRY:

Strengths

 Highly skilled human resource;

 Low wage structure;
 Quality of work;
 Initiatives taken by the Government (setting up Hi-Tech Parks and implementation of e-
governance projects);
 Many global players have set-up operations in India like Microsoft, Oracle, Adobe, etc.;
 Following Quality Standards such as ISO 9000, SEI CMM etc.;
 English-speaking professionals;
 Cost competitiveness;
 Quality telecommunications infrastructure.

Weakness

 Absence of practical knowledge;

 Dearth of suitable candidates;
 Less Research and Development;
 Contribution of IT sector to India’s GDP is still rather small;
 IT development concentrated in a few cities only.

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GROWTH OF THE INDIAN IT SECTOR:

The Indian information technology sector is one of the sunshine sectors of the Indian economy
showing rapid growth and promise. The Indian IT-BPO sector is estimated to reach a target of
US$ 60 billion in exports and US$ 73-75 billion in overall software and services revenues by
2010.

India's information and communication technology market is estimated to grow 20.3 per cent
annually to reach US$ 24.3 billion b y 2011. The Indian IT and ITeS market is estimated to grow
at the rate of over 16 percent to become a US$ 132 billion industry, significantly, the domestic
market alone is expected to become over US$ 50 billion, with a CAGR of about 18.4 percent.
Simultaneously, the IT and ITeS exports are estimated to more than doubleto US$ 78.62 billion
by 2012.

Leading international companies have identified custom application development and

maintenance as priority areas due to high offshoreable component.

The demand for domestic BPOs has been largely driven by faster GDP growth and by sectors
such as telecom, banking, insurance, retail, healthcare, tourism and automobiles.

ITES now offers services such as Knowledge Process Outsourcing (KPO), Legal Process
Outsourcing (LPO), Games Process Outsourcing (GPO) etc. More and more sophisticated
products are being developed in India. The domestic BPO segment is growing annually at a rate
of nearly 35 - 40 %.The revenues generated by the BPO's are almost $1.18 million and the
domestic market is expected to reach $10 billion by the end of the financial year 2008. If it
continues to grow by the current rate then by the end of the financial year 2012 then IT and IT
enabled services will reach nearly US$330 million.

The electronics hardware is growing at over 30% and is expected to grow rapidly in the coming
years and is estimated to be US$62 billion by 2010.

According to a recent World Bank study, India is the preferred location for software vendors for
its quality and cost. India has strong UNIX base which provides opportunity for the development
of products for internet based applications. Further, India has global connectivity with
international dialing facility from over 13220 locations, Leased/switched high-speed data links

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from major centers through STPs and VSNL for point-to-point communication are also
available.

Patni Computer Systems Ltd:

Patni Computer Systems Ltd. (Patni) (BSE: 532517, NSE: PATNI, NYSE: PTI) is one of the
leading global providers of Information Technology services and business solutions. Over
16,000 professionals service clients across diverse industries, from 30 international offices across
the Americas, Europe and Asia-Pacific, and 22 Global Delivery Centers in strategic locations
across the world. We have serviced more than 400 FORTUNE 1000 companies, for over two
decades.

Patni delivers high quality, reliable and cost-effective IT services to customers globally. We
provide world-class technology services by constantly exploring and implementing innovative
solutions that drive long-term value to our customers.

As industry leaders, we introduced offshore development centers, pioneered "follow the sun"
development and support frameworks, ensuring compressed delivery timeframes.

Today, our solutions provide strategic advantage to several most-admired organizations in the
world. We have long-standing and vibrant partnerships with over 300 companies across the
globe.

VISION

“To be a trusted partner, powered by passionate minds, creating innovative options to excel.”

VALUES
 Passion
 Honesty & Integrity
 Innovation
 Operational Excellence

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  Accountability
 Customer Centricity

Patni Advantage

At Patni, they are focused on optimizing customers' investments in Information Technology.

They help customers envision and shape their future around the key drivers of technology,
productivity and cost-effectiveness.

Delivery Excellence

Our mature Quality framework assures quantum benefits to our clients.

 Proven Project/Process Management practices that are both effective and Model
compliant (ISO/CMM)
 Rich repository of Re-usable/Best practices/Learning derived from execution of large
number of Projects
 Testing methodology successfully applicable to both internal/external Quality Control
setups
 Quantitative Process Management with a robust metrics program.
 Patni's adherence and commitment to quality standards have resulted in our clients
relying on our competencies to provide value-added consulting and training on quality
parameters, best suited to improve and enhance their business processes.

IT Services

 Insurance & Healthcare

 Banking & Financial Services
 Manufacturing

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  Telecom
 Life Sciences
 Retail
 Warehouse
 Logistics & Transportation
 Energy & Utilities
 Media & Entertainment

Product Engineering Services

Patni’s Product Engineering Services group brings vast experience in providing R&D,
engineering services and product life cycle support in focused industry domains, namely:

 Automation & Control

 Automotive
 Consumer Electronics
 Medical Devices
 Mobile & Wireless
 Office Automation
 Storage, Networks & Computing.

Enhancing Competitiveness through Strategic Outsourcing:

 Transforming Remote Infrastructure Management to drive business value 

 The New Dynamics of 'Buy Vs Build'
 A guided approach to legacy modernization - Modernize your legacy applications
infrastructure using a phased approach
 IT Portfolio Rationalization – Aligning IT investments with business objectives
 Key cost influencers of an offshore outsourcing program - Understand all cost
components for realizing the full potential of an offshore outsourcing initiative
 Change Management: Building effective global sourcing relationships
 Transition Management – The key to successful IT outsourcing

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  Building Blocks of IT Governance – for maximizing effectiveness of Global Delivery
Models
 Key CIO challenges – Focus on strategic solution areas
 Patni Cost Transformation Framework

TechBytes

 Managed Application Services: A Recipe for Optimizing

 Business Process Management: Taking Mortgage BPO to the next level
 Getting started with Oracle Fusion 
 Composite applications for competitive advantage
 Maximizing ROI through Offshore Testing
 Getting ready for an Enterprise Services Architecture
 Predictive Analytics and Claims Processing
 Six Sigma and Process Improvement in Outsourcing
 IT Security Risk Mitigation
 What’s Old is Very New again - Adoption and Implementation of RFID in supply chains

iGATE:
iGATE Global Solutions Ltd(formerly Mascot Systems Ltd), incorporated in Dec 1993 to
provide offshore software delivery services from its offshore development centre located at
Bangalore. Latter the company has set up two more offshore development centers at Chennai and
Pune. The company originally incorporated as a private limited company was converted into a
public limited company on Jan 2000. The Board has changed the name of the company to
'iGATE Global Solutions Limited' during the year 2003. 

VISION

iGATE is not merely another static business entity, which provides IT Services, Business
Consulting and Business Process Outsourcing. Instead, it is a dynamic force that seeks to
transform the way the world does business. iGATE will evolve and change over time to meet the

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needs of the evolving markets. It will proactively shape new solutions and set the pace of change
in the market place.

VALUES

The Values which inspire us are summed up in one word PRIDE. PRIDE is an acronym for
Passion, Respect, Innovation, Denizen and Excellence.

As a fully integrated technology and operations company, it provides:  

 * Process Consulting - Enterprise Process Optimization, Strategic Location of services, Contact

Center Consulting, Data Analytics. 

 * IT Services - Technology Architecture, Enterprise Systems, Enterprise Application

Integration, Data Services, Custom Application Development and Maintenance. 
  * Business Process Outsourcing - for mortgage banking, Insurance and capital market
industries, Finance & Accounting services and Contact Center Solutions across verticals. 
  * Business Services Provisioning - includes the complete solutions delivery models,
methodologies, work-group products, processes, systems, tools, people and knowledge
management for distributed delivery management. The company provides its services in a
systematic context with full metrics support for both business unit and business support
functions. 

At iGATE, the CEO and the Governing Council Members believes that in order to bring the
future to present they need leaders. Then the questioned arisen was, is managers different from
leaders and does organizations need leaders. The answer they came up was “leaders create,
managers preserve”. To make this possible they went further in getting involved in creating a
framework for leadership development. The mandate was to create a model that fuels the
organizational and individual growth.

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 Fig: Leadership Development and growth

This helped the company to grow as well as they have taken both organic and inorganic path for
growth. Above all innovation was the center of their core values. Over the last five years iGATE
has successfully transformed into best in class performer.

 Success in higher value added service:

1. iTOPS is a more attractive long-term offering due to client stickiness and margin
profile.
2. iGATE is the first outsourcing provider to offer outcome-based solutions through
a converged IT and BPO model (iTOPS).
3. iTOPS successfully implemented in top clients.
4. Transformed iGATE from a staffing firm to a full service outsourcing/project and
advisory firm.

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  Ability to retain top talent:
1. iGATE has consistently ranked among top employers
2. Industry-leading brand recognition to attract top talent

 Improved financial performance:

1. iGATE management increased operating margins from (3.7%) in 2005 to 20% in
Q3 ’10.
2. Historical focus for iGATE’s transformation was on better price realization,
onsite-offshore mix and improving resource efficiency.
3. Opportunity to leverage back-office operations and global delivery infrastructure;
and improve resource efficiency across iGATE.

 Streamlined corporate structure:

1. iGATE has experience with corporate restructuring, from spin-off to divestiture.
2. Successfully delisted Indian subsidiary (iGATE Global Solutions) from Indian
Stock Exchanges.

Decision to Acquire Patni Computer:

IGate announced that it would be acquiring a majority stake in Indian IT firm Patni Computer
Systems. What makes the deal interesting is that Patni is actually larger than IGate in terms of
market cap. The integration of Patni Computer Systems with iGATE, expected to be completed
in 12 months, offers multifold synergies to the combined entity. This should trigger a re-rating of
Patni's stock during the period. iGATE has offered 503.5 per share to purchase a nearly 63%
stake in Patni.

This values the seventh-largest IT exporter listed in India at 6,614 crore, or nearly 10 times its
expected 2011 earnings. Most other top-tier players command a P/E of more than 20.

The wide discount in Patni's valuations is on account of its lower growth and dwindling margins

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in the last few quarters. It has not been able to take advantage of the global IT outsourcing
demand recovery due to internal issues. iGATE's entry is expected to change Patni's fortunes.

First, it settles the long pending ownership woes of Patni, thereby offering focused leadership.
Second, iGATE will strengthen Patni's banking and financial vertical. Patni has traditionally
focused on insurance, manufacturing, retail and distribution segments. These verticals account
for nearly two-thirds of its revenue.

In the last few quarters, the banking and finance vertical has seen a sharp turnaround globally.
But this has not benefited Patni; the domain makes up for just over 11% of its revenue. For its
larger peers, BFSI contributes more than 40% of total revenues.

iGATE enjoys a higher exposure to BFSI vertical, which should strengthen Patni's offerings.
iGATE has shown a higher double-digit growth in the last few quarters in both sales and profits.
Its operating profitability has also been stable during the period. This could boost Patni's growth,
which languishes in the lower single digits.

Benefits that will be realized from Merger:

 Combined entity will have close to $1 billion in revenue and over 24,000 in headcount
 Combination will create a compelling new go-to-market strategy, with iGATE’s
differentiated iTOPS and outcomes-based pricing model augmented by Patni’s delivery
expertise and focus on micro-verticals
 Combination will bring together world class leadership that can create scale synergies
and growth
 Firmly positions iGATE-Patni as a top-tier player in the highly-fragmented global IT
industry

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 Combined company will have a strong presence across several verticals including
Banking & Financial Services, Insurance, Manufacturing & Retail, Communication &
Media, and Utilities
 Combined company can create a stronger employer brand to help retain talent and reduce
attrition iGATE has been ranked among top 3 in all the best employer surveys in India in
the last 4 years
 Increased access to global customers and entry into new geographies
Combined entity will have 360+ clients globally including top Fortune 500 blue
chip clients
Healthy combined client mix: Top client – 13%, Top 5 – 38%, Top 10 – 49%
Combined global footprint with presence in North America (80%), EMEA (14%),
and APAC (6%)
Diversified customer base – two $100+ million customers, two $50+ million
customers, and more than 36
$5+ million customers
Opportunity to cross-sell services to a broader client base

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Creation of “Tier 1” Player:

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Financial Performance:

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About the Deal:

 A Reverse Merger with Igate

 $ 1.22 b deal
 Patni Computers has 14000 employees and Igate has 7000 aprox
 Apax partners to provide $400m for the buyout, wants 15% of the growth share
 Rs. 503.5/share paid by Igate @ $ 921 m ($100m cash)
 Also leveraged by Jefferies & Co., Royal bank of Canada, Credit Suisse, Deutsche bank
etc
 Patni’s share up by 0.8% at Rs. 463.85 (though market fell)- Market positive

Financing the Deal – Debt Financing:

iGate has debt commitment from Jefferies & Company, Inc. and RBC Capital Markets,
LLC totaling up to $750 million, consisting of:
 Approximately $600 - $700 million for transaction financing, depending on the
number of shares acquired in the mandatory tender offer; and
 $50 million revolving credit facility
The long-term capital structure will likely consist of Senior Notes and be put in place
during Q2 2011
Based on the available commitments, pro forma leverage expected between 3.0x-3.5x
fully consolidated adjusted EBITDA, and net debt(1) expected below 2.0x fully
consolidated adjusted EBITDA
Given the combined Company’s anticipated growth and expected free cash flow
generation, iGate expects net leverage levels to decline continuously

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Post Merger Entity:

 $ 1 billion revenues of the merged entity

 Broad based area of operations of the merged entity
 Will Igate to get into manufacturing, and, Patni into banking verticals
 Employee attrition issue, as Igate is half the size of Patni
 Delisting of Patni from Indian Exchanges a possibility
 iGATE, through its subsidiaries, has entered into definitive agreements with the three
founders of Patni and private equity firm General Atlantic to acquire 63% of the
outstanding shares of Patni Computer Systems Ltd. (“Patni”) as of December 31, 2010
 From the three Patni founders 60,091,202 shares at a purchase price of Rs. 503.50
per share representing 45.6% of current equity capital
 From General Atlantic 22,913,948 (combination of ADS and shares) at a purchase
price of Rs. 503.50 per share representing 17.4% of current equity capital
 As per SEBI regulatory requirements, iGATE’s subsidiaries along with iGATE will
make an open offer for an additional 20.6% stake in Patni, if fully subscribed, will
account for 27,085,565 shares
 The transaction is valued at approximately $1.22 billion, including the mandatory
open offer to the public shareholders of Patni.
 Subject to regulatory and other customary approvals, Igate expects the transaction
to close in the first half of 2011
 The transaction will be funded through a combination of balance sheet cash, debt
and fresh equity issuance
 Expect deal to be accretive by 2012 on a cash earnings per share basis
 Will use cash from operations to service and pay down debt of the combined
company

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INTEGRATION COULD BE PAINFUL:

If there is management attrition at Patni, then integration will be painful and will delay the
process. iGate is heavily leveraged. Patni is sitting on cash. Now, there could be loans and
advances that could go to iGate books once the transaction gets completed.

Summary of Key Takeaways:

 Creates “Tier 1”
 Player End-to-End Capabilities
 Team with Transformational Experience
 Attractive Financial Performance
 Broad Vertical Mix
 Diversified Blue Chip Client Base

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