iGate Buys Patni in West Meets East Outsourcing Market Move

The pundits predicted it. And I believed them. And, well, here we are barely two weeks into the new year, and the prediction has come true. To wit: Expect to see some kind of merger or acquisition between an Indian outsourcing firm and Western one = iGate Corp. has bought India’s Patni Computer Systems Ltd. in a deal valued at $1.22 billion. The news hit the wires Monday, Jan. 10.

iGate, headquartered in California (though it has most of its software development centers in India), is a U.S.-based midsized outsourcing firm buying an Indian outsourcing firm that’s for all intents and purposes, bigger than it is. Patni had about three times as much revenue and has twice the staffers, according to Dow Jones Newswires. In fact Dow Jones Newswires reported that Patni (which is listed both in India and the U.S.) posted revenue of $689 million for the 12 months ended Sept. 30 and had 16,556 employees. iGate reported revenue of $252 million for the same period and had 8,278 employees.

So what drove a smaller outsourcing firm to purchase a bigger, Indian one? According to this article in ComputerWorld UK, the acquisition was driven by iGate’s (and other smaller outsourcing companies) need to get bigger in order to compete in the increasingly tough outsourcing market. Apparently, businesses are looking themselves to consolidate their outsourcing providers and want firms that can be one-stop-shops. And I thought the era of mega outsourcing deals was going the way of the dinosaur.

Interestingly, although the acquisition is valued at a big $1.22 billion, the resulting company by industry standards will still only be a mid-sized player, albeit a high-end one. Most market sizing estimates don’t consider companies to be large until revenues reach $1 billion or more. And compared to Indian outsourcing behemoth  Tata Consultancy Services, which had revenue of $6.34 billion for the fiscal year ended March 31 last year, the combined revenues of iGate and Patni of $941 do seem rather small.

In a conference call earlier this week discussing the acquisition, Patni executives were upbeat and said the two companies’ offerings were complementary. I had the opportunity in December to talk with a Patni executive, Satish Joshi, executive VP and global head of technology & innovation with global IT services provider Patni. We spent a lot of time talking about the cloud, and its impact on outsourcing and Patni’s efforts to harness the cloud, and I have to day I was pretty impressed with what the firm is doing.

Joshi and I talked a little about Patni’s beginnings – it started in the early 1970s and its core has always been custom software development with a focus on back-office processing, application management and infrastructure management and it continues to evolve its IT services offerings for a spectrum of industries. Many of its clients are in insurance, manufacturing, retail, and product engineering; about 10 percent are in financial services (iGate is stronger in the financial services and banking industries). More recently Patni has expanded into life sciences. As far as regions, about 75 percent of its customers are U.S.-based; about 18 percent are in the United Kingdom and mainland Europe and the Asia-Pacific region (primarily Japan). India is an emerging region for Patni.

It will be interesting to see how this newly formed West meets East outsourcing firm shapes up. Since iGate has such a big footprint in India already, and since Patni has such a strong presence among Western customers, I’m not expecting it to be earth-shattering or even boat rocking. More likely, it is simply a precursor of the consolidation in the IT outsourcing industry that will surely come. What about you all? What do you think?