California-based iGate (Nasdaq: IGTE ) recently announced plans to issue $770 million worth of senior notes to finance its acquisition of Patni Computer Systems (NYSE: PTI ) , which could reach $1.22 billion. These notes will bear interest of 9%, due twice a year. iGate, backed by equity group Apax, agreed to acquire Patni back in January of this year. My notes on the deal don't bear any interest, but they might prove interesting to you.
Let's make a deal
To offer some context here, iGate is an information technology company offering business processing solutions. It competes in an industry headed by rivals such as Infosys (Nasdaq: INFY ) and Wipro (NYSE: WIT ) .
When it goes through, this deal should give iGate access to a much larger customer market. For iGate, this is less a bolt-on acquisition than a marriage of equals. Individually, these two firms are much smaller than many of their key competitors, but together they'll be better placed to tackle larger problems -- and, perhaps, eventually challenge the sector's bigger players.
Running the numbers
After a brief slump in 2009, iGate's revenue grew 45.3% to $280.6 million in 2010. Its net income rose to $51.8 million from $28.6 million, and its net income margin climbed to 18.4% from 14.8%.
Patni booked $701.7 million in revenue in 2010, with net profit of roughly $134 million, a margin of close to 18.7%. Assuming no craziness occurs, the acquisition could mean that consolidated revenue, as per last year's financials, will more than triple for the new, combined iGate.
Today, iGate is more or less self-sufficient. It has no debt, and EBITDA sits at $65.7 million. Judging from these numbers, iGate's fundamentals look good, and it's safe to say that the company's in a sound position to take on the debt necessary to finance this deal. I'm pretty satisfied with what I see here.
The Foolish bottom line
Between iGate's financials and the additional earnings power Patni will add, the company can easily shoulder the debt it will incur from these senior notes. Once this deal goes through, it will definitely create synergies, but in a field dominated by the likes of Accenture (NYSE: ACN ) and Infosys, iGate and its new partner still won't be in for a cakewalk.
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