iGate Shares Plunged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of IT services provider iGate (Nasdaq: IGTE  ) dove more than 20% in intraday trading as investors reacted to a Wall Street Journal report that the company is raising $700 million to make a bid alongside Apax Partners for India's Patni Computer Systems (NYSE: PTI  ) .

So what: Though we can say that iGate competes with major global outsourcers such as Infosys (Nasdaq: INFY  ) , Wipro (NYSE: WIT  ) , and Cognizant (Nasdaq: CTSH  ) , the company is definitely an industry small-fry. iGate's $252 million in trailing-12-months revenue is a fraction of the billions that the other three giants have raked in. It's also dwarfed by the $686 million that Patni earned over the same period, making the acquisition a pretty big bite for iGate.

Now what: The drop in iGate's stock today shouldn't come as much of a surprise. By going after the larger Patni, iGate is setting up a deal that's riskier than most. And while the valuation multiples on Patni are low compared to iGate and other industry players, the sellers in this deal are the company's founding family and private equity group General Atlantic -- neither of whom is likely to be interested in selling if the price wasn't attractive. Tack on top of that the fact that iGate and Apax will face competition for the deal from Advent International and Carlyle Group, and you have even more reason for indigestion. Of course for now there's a lot of speculation involved in how (and whether) this will unfold, so investors will want to stay tuned as more details emerge.

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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you no Wookiees were harmed in the making of this article.


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  • Report this Comment On November 30, 2010, at 8:58 PM, bharryz wrote:

    Good analysis. It is interesting to note that iGATE trades at 20x(after the big drop) of 2010 earnings and Patni 10x. Yet, the metrics such as Gross Margin(high 30s) & EBIT margin(high teens) are the same for both the cos. A key difference is iGATE had solid topline growth in the last 4-5 qtrs as compared to Patni's flat topline in the same period.

    iGATE-Apax partnership may have to pay a little premium here. It will be interesting to get clarity on the structure/financing of the deal here. And I am not sure if iGATE has any history of integrating large acquisitions. Particularly, in this case the situation seems to be the smaller fry/mgmt will take over the big one. There will be a lot of heart burns in Patni senior mgmt side. There could be revenue leakages as well. Certainly, a lot of risk & uncertainty is yet to be priced in IGTE.

  • Report this Comment On December 06, 2010, at 9:13 PM, keith60 wrote:

    I've owned igte since march 2009, with an average share price of $3.49. Wondering if I should take my gains and leave?

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