Will Larsen & Toubro (L&T) and its boss, A M Naik, be third-time lucky with Hexaware, after failing to buy Satyam Computer Services and Patni Computer Systems? Many would like to think so.
Hexaware’s top brass is believed to have met Naik in his office last week. Though details of the discussion are still not known, the timing of the meeting has triggered large-scale speculation about L&T Infotech, the engineering company’s information technology (IT) arm, exploring options of buying out Hexaware.
Hexaware founder and chairman Atul Nishar and his two private equity (PE) shareholders, General Atlantic and ChrysCapital, had recently roped in investment banks Morgan Stanley and Credit Suisse to advise them on selling a majority stake in the company.
While the promoter stake stands at 28 per cent, General Atlantic owns a little less than 15 per cent and ChrysCapital has 9.77 per cent of the company.
Several foreign technology giants like NEC, NTT Group and US PC manufacturer and services player Dell, along with a clutch of large PE buyout funds like Providence and Advent, are believed to have been approached, as well.
Sources following the developments say L&T has thrown its hat in the ring, but high valuation expectations of Hexaware’s promoters may throw a spanner in the works.
According to them, the promoters expect the company’s value to be $700-800 million (Rs 3,500-4,000 crore) — 15 times calendar year 2011 (CY11) earnings before interest, taxes, depreciation and amortisation, and around two-and-half times sales.
Hexaware posted Rs 1,450 crore ($308 million) in revenues for CY11 from 51 clients. It ended the financial year with 8,317 employees.
Though talks are still on, L&T has roped in Citibank to advise it on the transaction. Citi had advised L&T on previous occasions as well, including Satyam.
A L&T spokesperson told Business Standard: “As a policy, we would not like to comment on any market speculation. I am unaware of these developments that you are mentioning.”
A Hexaware spokesperson said, “As a policy, the company does not comment on market rumours and speculation.” NEC did not respond to mails.
Hexaware has been on L&T’s radar for a while. Senior L&T officials did admit a few months back that they would be keen to look at Hexaware, if the price expectation matched their assessment. According to them at that point, the Hexaware sell-off process would have taken off by mid-March, a perfect time to have revived negotiations with the company.
Analysts see value and synergies if L&T goes ahead and buys out Hexaware. Some would go to the extent of suggesting L&T and foreign technology players like NEC may actually end up putting in a joint bid, as both have business relationships in the IT-enabled services space.
Both NEC and L&T have been looking at scaling up their operations. For L&T, Infotech is a laggard when compared to its other verticals.
Industry sources who track L&T said last year the company had even reached out to several Japanese technology majors with aggressive expansion plans in India to explore possible joint ventures and other “strategic opportunities for organic and inorganic growth”. Japanese investment bank Nomura had even approached some Japanese firms on L&T’s behalf.
Back home, there have been efforts to merge L&T Infotech with another mid-sized domestic IT company to create scale and value.
These are attributes that L&T Infotech lags today. So, Hexaware may well be its portal to break into the $1-billion club. L&T Infotech’s 2010-11 revenues were at Rs 2,283 crore ($550 million). It has clocked revenues of Rs 2,349 crore ($410 million) for the three quarters of 2011-12. And in technology, size and scale are increasingly becoming strategic.
“Hexaware has a good presence in the capital markets. It has a good Oracle practice that can be leveraged at L&T Infotech that is strong in SAP practice. The enterprise application offering of Hexaware is strong. But more importantly, I think Hexaware has a good management team. I think if the acquisition is successful, the combined entity will be a good powerhouse in the ERP segment,” said Sudin Apte, research director and chief executive, Offshore Insights.