Business Today

Software's comeback man

twitter-logo Sunny Sen        Print Edition: October 2, 2011

Some may call him reckless, but Phaneesh Murthy, CEO of iGATE Corp, the Californiaheadquartered IT firm, is certainly known for his quick decisions. In August last year, following a visit from two officials of a US private equity, or PE, firm, he telephoned his Chief Financial Officer Sujit Sircar. The 30-second call was their first discussion about acquiring Patni Computers, a Pune software firm with almost three times as much revenues as iGATE.

The two began working out the funding: iGATE, earlier known as Mascot Systems, had only around $100 million as cash reserve, but would need $1.2 billion to buy Patni. Serendipitously, Murthy was then also talking to Apax Partners, a British PE firm, on a funding tie-up for possible acquisitions. He lost no time in linking the two.

About five months later, on January 11, 2011, he sealed the deal to buy Patni from its promoters, and by July, he had completed the first leg of the integration.

Since the Patni acquisition, Murthy has been visiting India more frequently, travelling to Bangalore where iGATE has its India office, and Mumbai, where Patni was headquartered. The travel does not tire the 48-year-old, whose tastes reflect his impatient self. He loves reading murder mysteries, but stops reading if the book does not include three or four murders within the first ten pages or so. "Or else it does not hold my interest," says Murthy with a shrug.

Up, down and up again

Murthy's own story has been equally gripping, albeit without murders. He rose to fame in Infosys, today India's No. 2 software firm by revenues, in the late 1990s and became one of its board members. He was often called the 'other Murthy' (as distinct from Infosys founder N.R. Narayana Murthy). But in 2002 he was embroiled in a sexual harassment case in the US, and resigned from Infosys to start his own firm, Quintant Services - which was acquired by iGATE in July 2003. Murthy became iGATE's CEO.

At the time iGATE, 46 per cent owned by founders Sunil Wadhwani and Ashok Trivedi, was an ailing company. It had reported revenues of $288 million for 2003, down sharply from a peak of $492 million in 1999. Murthy says iGATE's model was flawed, with over half its revenues coming from providing staffing to its clients. He made an ambitious mission statement then: iGATE would be a billion-dollar company by 2012.

He got down to changing the operating model. The next year in 2004, iGATE was growing again though at a slow pace. It reported revenues of $307 million in 2007. Then came the global financial crisis of 2008. The entire IT industry slowed down, and iGATE's revenues slipped to $219 million in 2008 and then to $193 million in 2009. "The recession pushed us back by two to three years," says Sean Narayanan, Chief Delivery Officer of iGATE. Narayanan remembers how employees would ask: 'How will we reach the billion-dollar target in two years?'

An opportunity came in 2009, when iGATE bid for the beleaguered Satyam, put on sale by the government. But Tech Mahindra put up $579 million and outbid iGATE. Murthy learnt a lesson: next time, firm up PE backing beforehand. In August 2010, two partners from PE firm General Atlantic, which held 14.6 per cent in Patni Computers, landed in California.

"They entered the room and, even before they sat down, they said they want us to buy Patni," says Murthy. He realised Patni had what iGATE needed - $700 million in revenues, strong verticals in insurance and healthcare, which iGATE did not have, $300 million in cash and $200 million in land assets. "Patni was such a beautiful combination… This was the future of iGate," says CFO Sircar.

Analysts agreed. "With the combined entity now at a $1 billion-plus annual revenue run rate, iGATE has greater scale and broader capabilities, which should help the company compete for larger contracts," said a report by global securities' and investment banking group, Jefferies and Company, in August.

When the acquisition was made, iGATE had $281 million in revenues. Murthy had managed to keep iGATE on a constant growth path, barring the few years of the recession. When he joined iGATE in 2003, the stock was at an abysmal $2 per share. It hit $25 in October 2010, but fell to $11 after the Patni acquisition, reflecting the integration risks investors perceive already for iGATE.

Changing the guard
By the time iGATE set its sights on Patni, Murthy had moved the company away from staffing to outsourcing, determined to create a niche in which it could be a leader since he had no hope of getting to the top with traditional IT servicing.

Murthy always wanted iGATE to lead in outcome-based pricing, but the acquisition of Patni has lowered the share of such revenues to 35 to 40 per cent from 70 per cent. But he is confident he can increase gross margins to 40 per cent and EBITDA (or earnings before interest, taxation, depreciation and amortisation) margins to 25 per cent. "We took iGATE's gross margins from 25 per cent to 40 per cent and we figured out that we can also take Patni's gross margins from 33 per cent to 40 per cent." Some analysts are not so sure.

"(The) management continues to target 25 per cent EBITDA margins by mid-2013 (vs 17 in the second quarter, 2011), which appears somewhat aggressive to us given current expense rate..." said a quarterly report in August by investment firm, Oppenheimer.

The acquisition has also eroded iGATE's market capitalisation. "From a market perspective it is a very risky move," says Murthy. "For me this is a huge bet, because if this does not pay off, I will be the guy with the world's largest failed transaction in the services industry. But if I pull it off, the amount of shareholder value that we create will be phenomenal."

So Murthy and his team have focused on integration first, with Srinivas Kandula, Executive Vice President and Global Head of HR at iGATE co-heading the effort with Sunil Chitale from Patni. Cultural integration was the single biggest fear in Kandula's mind and he set up six tracks - HR, customers, delivery, finance, enabling entities, and pipeline protection - to drive integration carefully.

Tomorrow and tomorrow
Murthy wants iGATE to be a $3 billion entity by 2017, by when the focus on HR integration will be visible, if Kandula has his way. He intends keeping iGATE staff at 55,000, about its current levels despite growing revenues three times. iGATE is now looking for larger global accounts. In the June-ended quarter, iGATE added 21 customers, including nine Fortune 1000 companies, and is looking at deals worth over $100 million.

"We are encouraged by the management commentary that suggests a second quarter revenue bottom and that the sales pipeline includes large, five-to-six-year contracts running as high as $100 million," says Jeff Martin, analyst with investment banking firm ROTH Capital Partners, in his August report.

His employees may consider him pushy, but Murthy says: "At 48, I am not going to change. I'm pushy, I'm finicky. I'm anal about certain things." He thinks excellence cannot be achieved by ordinary behaviour. Some decisions, Murthy believes, cannot be taken by consensus. He takes 10 to 20 per cent of the decisions himself, seeks consensus on another 40 to 50 per cent, and does not bother with the rest. Nobody is saying whether the Patni acquisition was Murthy's decision alone or a consensus one.

By 2017, Murthy will be 54. He plans to lead an easier, perhaps retired, life starting 55. But can he curb his restless spirit?

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