Apax pullout from IGate could trigger bidding war: Capgemini, Atos & Genpact in race for stake

MUMBAI: Less than two years after Phaneesh Murthy left under acloud, the company whose path he charted has turned from being a buyer to a target, as the private equity firm that put up the money for IGate’s Patni Computer acquisition looks to exit. The IGate sale process could end up in a bidding war among players such as Capgemini, Atos and Genpact, as the US-listed company is on the top of the list of acquisition targets in the IT industry, say experts.

It has been put on the block by Apax Partners, which owns about 30% of the company. Apax had financed IGate’s $1.2-billion (Rs 7,482 crore at current exchange rate) takeover of Patni. In November, Apax converted its debt in the company into equity and then filed with the US Securities and Exchange Commission to have the option to sell its entire stake.

“IGate is the Goldilocks of the IT industry. They are not too big, not too small. They are just the right size and scale. And they’d be a good fit for Capgemini, Atos or even Genpact,” said Peter Bendor-Samuel, CEO of IT advisory firm Everest.

Bendor-Samuel said the company’s list of clients – General Electric, Royal Bank of Scotland, Rio Tinto, CNA, UBS and others – was also a draw. “The opportunity to cross-sell to IGate’s client roster will be quite large,” Bendor-Samuel added.

IGate’s mixture of IT and BPO services also makes it a good target. Capgemini has been looking to grow its application development and management (ADM) business in the US, as well as its BPO business and offshore presence.

Atos, which acquired Xerox’s infrastructure-heavy IT outsourcing business, also needs to boost its ADM business, experts say. The Business Standard newspaper reported on Friday that both were in the race to buy IGate.

But of the two French IT services providers, Capgemini is expected to be a more likely buyer for the US-headquartered company, according to analysts.

Capgemini would receive additional tax benefits from the deal, as it is carrying a large deferred tax asset in the US, London-based UBS analyst Michael Briest said in a note.

Capgemini is carrying more than $1 billion in net operating losses on its books. For Genpact, acquiring IGate would help boost the IT services business, created when it bought Headstrong.

“The way it stands, Genpact needs to boost IT services because Headstrong was subscale and though it is growing, it needs to get bigger to meaningfully move the needle.

Apax has approached them. It’s a question of whether Bain is willing to pay,” an investment banker with knowledge of the matter told ET. Privateequity firm Bain Capital owns 30% of Genpact. IGate, Genpact, Apax, Capgemini and Atos didn’t respond to emails seeking comment.

IGATE’S TROUBLES

IGate is not without its troubles. One of its largest clients, Royal Bank of Canada, has been facing problems for its use of IGate services while GE’s contribution to revenue has been falling. Chief Executive Ashok Vemuri’s hire-forgrowth plan hit a snag in the fourth quarter when headcount actually fell by about 900 employees. Annual net revenue grew just 10% to $1.27 billion in 2014, lagging growth rates in the IT industry.

But despite the challenges, given that IGate is listed in the US, a typical premium it could expect is about 30%, UBS’ Briest said. Several other experts say the premium could go much higher if more companies enter the fray.

A sale would mean uncertainty for Vemuri, who left Infosys to take over as IGate’s CEO after Phaneesh Murthy left the company.

“I am sure a buyer would want to keep him on. But he left Infosys for a CEO role; it would be hard to go back from that. I think, if the sale goes through, Ashok will go looking for another CEO position,” Everest’s Bendor-Samuel said.