In what would be the first large deal by a Japanese firm in the Indian information technology space, NTT Data Corporation is acquiring the Hyderabad-based IT offshoring firm Intelligroup. The deal value for the 100% acquisition is pegged at $199 million, according to a filing. The deal would give an exit to its private equity investors SAIF Partners and Peepul Capital (earlier known as iLabs). The deal involves all-cash tender offer, followed by a second-step merger to acquire all remaining shares at the same price paid in the tender offer, said Intelligroup in a statement.
The deal will give the investors an exit of approximately 5x. SAIF and Venture Tech (an investment vehicle of iLabs) hold a majority stake of around 63% stake in Intelligroup. While SAIF’s holding is at 37%, Venture Tech holds the remaining 26%. The two investors had put $15 million in 2004 and then subsequently invested another $10 million in 2006.
The shares of Intelligroup closed at $3.64 on Friday with a market capitalisation of $150 million. The deal with NTT has been struck at $4.65 per share, which represents a 27.7% premium over the closing price of Intelligroup’s common stock on June 11, 2010. NTT DATA, through its wholly-owned subsidiary, Mobius Subsidiary Corporation, will make the offer.
Earlier media reports had suggested that NTT is close to acquiring Patni Computers by buying out the stake of promoters and private equity major General Atlantic. But sources tell VCCircle that the deal between Patni and NTT may not fructify. Also, going ahead with a relatively smaller acquisition would make the deal easier to digest and integrate for NTT. A deal to acquire a majority stake in Patni would have cost NTT around or more than $1 billion.
Among the domestic players, Mindtree Consulting and Patni Computers had initially expressed interest in Intelligroup. But talks with MindTree did not progress on the valuation concerns while Patni Computer dropped out after initial parleys, said sources.
Intelligroup is one of the largest ERP providers, with around 70% of the company’s revenues coming from the ERP business. The deal makes strategic sense since Japanese firms have been interested in the enterprise resource planning (ERP) and banking services players in the Indian IT space.
Intelligroup, which is registered in the US and listed on the OTC Bulletin Board (OTCBB), had revenues of $126.5 million in 2009, a decline of 19.5% as compared to 2008. Its gross profit decreased to $42.4 million but the margin improved to 33.5% compared to 31.5% in 2008. The debt-free Intelligroup also had $23.2 million of cash, cash equivalents and short-term investments at the end of 2009. The firm currently employs around 2,255 people, with 75% in India and another 20% in United States.
The transaction would give NTT DATA access to Intelligroup’s blue-chip client base and specialized knowledge of SAP and Oracle, it said in a statement. NTT DATA would also benefit from Intelligroup’s deep industry experience and solutions focused on the life sciences, high-tech and discrete manufacturing, and consumer packaged goods verticals and its efficient global delivery model, enabled by world-class delivery centers in India.
“NTT DATA’s size and global IT capabilities including data centers and cloud computing enhance significantly our ERP solution capability and also allow us to offer Total Outsourcing solutions. It enables us to offer enhanced vertical offerings, and greater geographic coverage to our customers. Further, this allows us to leverage the financial strength of NTT DATA which enables us to make greater and more long-term investments in the business,” said Vikram Gulati, Chief Executive Officer of Intelligroup.
Mitsubishi UFJ Morgan Stanley Securities Co. is acting as the exclusive financial advisor, and Morrison & Foerster LLP is acting as the legal advisor to NTT DATA on this transaction.
Credit Suisse Securities (USA) LLC is acting as the exclusive financial advisor to Intelligroup, and Jones Day and Lowenstein Sandler PC are acting as Intelligroup’s legal advisors.