Early last week, we reported and debated in our newsletter, about the high probability of Patni Computers selling its majority stake to iGate Global Solutions. Well, if Economic Times is to be believed, our expectations were validated, and the wedding is official! So what now? Though in the long run, iGate and Patni will both benefit from this move, there are many hurdles along the way, before the promised happy ending…
- Battling attrition – Patni already experiences one of the highest industry attritions, at around 26 percent, compared to 14-17% for Infosys and TCS. As with any change in ownership, there is bound to be a slight acceleration in attrition soon. This may especially apply for Patni, as the acquiring company in this case is a much smaller entity. The IT-BPO industry is already seeing very high attrition, and neither Patni nor iGate will be spared, making stability a concern in the next 6 months.
- Retaining clients – An interesting study by advisory firm Offshore Insights reveals that if iGate emerges victorious, Patni could lose anywhere between 15-20% of its revenues due to client losses. While that may sound like a bit of a stretch, the reality may not be far from these estimates. The biggest cause for concern is that Patni is currently exposed to high risk in its client composition. Nearly half of its revenues have been consistently derived from its top ten clients. Losing any of these will thus significantly impact the topline! Another disadvantage and cause for worry is that Patni is not a top offshore provider to any of its clients, according to the report. Thus most clients are stocktaking their dealings with the service provider, just in case, and are most worried about how their offshore teams would be affected post the merger.
- Managing stability and risk- For the last few years, it has been known that Patni promoters have sought an exit from the company. With each wave of proposed stake sale, they have had to assure existing and potential clients of their stability of operations. In case there is a fallout with the latest iGate bid, the company will have to undertake a massive campaign to manage risk and restore any lost confidence in the marketplace.
- Managing growth – Though Patni has been around longer, it has seen far slower growth, compared to newer competitors like Infosys, TCS and Wipro. iGate will face an uphill battle to grow the company, with a carefully crafted joint strategy for the long term.
Recognizing the importance of planning for and meeting all the challenges outlined here, Patni has asked iGate to submit a preliminary strategy report before it goes ahead with the deal. This will outline all the measures and plans for the impending integration, and scenario planning for company stock movements.
This, of course, does not mean that there are no benefits! Once the dust settles, a strong new billion dollar IT player will emerge, with a more convincing value prop than the two companies in isolation. iGate-Patni will also be able to target iGate bid parter Apax Partners’ portfolio companies for new business.
In the meantime, let’s wait and watch for the final announcements, and the excitement after…what do you think will happen?