Carlyle, Apax join race for Patni stake

A clutch of top private equity guns, including Carlyle and Apax Partners, have shown interest in buying a large stake in Patni Computers, but the success of their venture depends on whether they can win crucial management rights and also secure the co-operation of Narendra Patni, the CEO and chairman.
Mr Patni, who is believed to be interested in continuing in his position after the exit of his brothers, has employment contracts that protect his interests till 2013.

According to the prospectus filed with the Securities and Exchange Commission (SEC) prior to its ADR issue on the NYSE, Mr Patni’s (Narendra) term as the chairman of the board of directors of his company ends in December 2008. However, he still has the option to continue for another 5 years in the same position in Patni Computers. Also, since Mr Patni’s consultancy agreement has been extended by the board of directors, he would also be able to continue as the CEO of the company till 2010. This is crucial to any new investor for the company, as they then would have to strike some kind of a compromise with Mr Patni in order to run the company.

In addition to all this, he also has a casting vote in case of a tie among the directors of the company. “Pursuant to an employment agreement with our US subsidiary, Patni Computer Systems Inc, and a consultancy agreement between our US subsidiary and us, Narendra K Patni serves as our chief executive officer and the chief executive officer of our US subsidiary.

So long as our consultancy agreement is in effect, Narendra K Patni will act as our chief executive officer and, pursuant to our Articles of Association, so long as he remains our chief executive officer, he will have the right to appoint and remove all key senior personnel and senior management, following consultation with General Atlantic. The employment agreement with Narendra K Patni has an initial term expiring on December 31, 2008, which can be extended at Mr Patni’s option for an additional 5-year term. In addition, our board of directors has approved the extension of the consultancy agreement to December 31, 2010,” Patni’s prospectus filed with the SEC says.

These points will be carefully noted by any prospective investor wishing to purchase the 28% held by Ashok and Gajendra Patni. Though they would probably hold a higher stake than anybody else, they would have to strike some kind of an agreement with Patni for smooth functioning of the company. “I am committed to this company and I have told the employees, customers that I am not selling,” he was quoted as saying in recent media reports.

Mr Patni was not available for comment and an e-mail sent to him by ET received no response. Patni Computer was started in 1978 by the three brothers — Gajendra, the eldest, Narendra and Ashok, the youngest. While all the three own nearly 14% stake each, private equity giant General Atlantic has close to 16% stake in Patni Computers. Gajendra and Ashok’s stake are up for grabs. Big private equity firms such as Carlyle, Apax Partners have shown interest in the purchase. People close to the situation warn that it could be quite some time before a transaction happens as the bidders are seeking clarity on their rights. Currently, Ashok and Gajendra Patni do not have operational control over Patni. Narendra Patni has run the show and is clearly in charge of operations, apart from being the public face.

A new investor will get the shares, but won’t inherit any major rights. He will have to engage in discussions with Narendra Patni to protect his interests. For the fiscal 2006, Patni reported revenue of $578.9 million.