Persistent is not new to merger and acquisitions, but the majority of its acquisitions have been in the range of $20 million to $90 million. Before Nagarro, the largest acquisition done by the firm was of New Jersey based Data Glove for $90.5 million.
However, the company is confident that it will be able to integrate Nagarro quickly into its fold and step on the growth pedal as both the companies are culturally similar with significant presence in India.
“Most of these acquisitions have an integration issue that can derail them,” said Persistent Chief Executive Officer (CEO) and Executive Director Sandeep Kalra in a conference call with analysts on Sunday. “But culturally both are similar with significant presence in India. If this was a pure play European company with no footprint in India, the integration would have been harder to push up the hill which takes a thorn out of the equation. The problem is less on the cultural side than on the expansion side.”
Despite the management’s confidence, the company’s stock fell on Monday. The shares plunged 11.2 per cent to close at ₹4,298 on the Bombay Stock Exchange (BSE).
“We think this acquisition fits Persistent’s goal of reaching $5 billion of revenue by FY31 with higher presence in Europe. However, given the large size of the transaction, a seamless execution is critical to create value for the shareholders in the medium to long run,” Nomura wrote in a note.
Persistent Systems also said its deal to buy Nagarro will not dent margins and it was not paying a huge premium for the German digital engineering firm, whose growth has been flat over the last two years.
“Their margins in the last quarter were good, and there will be cost synergies. The ambition is to put that back in growth and expansion. We will maintain the margin of the combined entity and it will not be less than Persistent,” stressed Kalra when asked if there is a risk of that slipping below current levels.
The other concern is the headcount addition. Praveen Bhadada, CEO and managing director (MD) of Neovay Global, says the headcount addition comes at a time when the conversation is shifting fast towards density of AI capability and revenue per employee.
“The deal adds significant headcount at similar revenue-per-head and slightly lower margins. None of that makes it a weak move; it's a strong play on the current map. The more interesting question is whether the combined business can use this new scale as a platform to become sharper, AI enabled and more IP-led over time, rather than simply larger. If Persistent executes with that ambition, this could prove to be both a financially smart deal and a strategically forward-looking one."
Kalra remained confident on that, stressing on the complimentary capabilities that the merged entity will bring especially in geographies of Europe and West Asia, verticals like industrial and consumer and other capabilities where Persistent has a very small presence.
Analysts were more concerned about Nagarro’s flat growth over the last few years with total revenue of 1 billion euros and 18.4 per cent compound annual growth rate (CAGR) in the last five years. Persistent, in comparison, grew at about 24 per cent. Multiple brokerage houses said they would await greater clarity on integration, cost synergies, and the path toward margin convergence, given Nagarro's lower profitability.
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