Patni, MphasiS in race for AIG unit

Patni Computer and MphasiS are among the potential suitors looking to acquire the Indian software unit of troubled insurance giant AIG, said a banking source familiar with the development.

The software unit, AIG Systems Solutions, is on the block as part of the insurance behemoth’s plans to divest assets globally and focus on its core business. Deloitte is running a sale process for the unit, which has over 1,000 employees and annualised business estimated at $30 million. The sevenyear-old AIGSS has centres in Chennai and Kolkata. The deal-making is still in preliminary stages.

Other middle-rung Indian IT firms like MindTree and a few private equity investors could also be in the race even as AIG’s lack of assurance on a committed business flow in the future has dampened the interest of some suitors, sources added. Polaris, TCS and MindTree figure in AIG’s vendor list.

The recent sale of the captive back-office arms of Citigroup and Aviva came with a multi-year assured business contract from these firms. The issue of business shrinkage as AIG divests many of its divisions was another concern for the suitors. The US Federal Reserve bailed out AIG from bankruptcy by pumping $85 billion loan in return for majority control.

While AIG said, “it does not comment on market speculation,” an MphasiS spokesperson said the company declined to comment. Patni Computer Systems and MindTree Consulting did not respond to e-mail queries sent on Monday.

The uncertainty over future business from AIG is likely to impact the deal valuation. One banking source said the deal could be valued at best as one-time revenue, which is around $30 million. But the fact that AIGSS has a high quality team engaged in 70% off-shore work could be a positive.

But the catch is whether AIG would sweeten the deal by offering a long-term outsourcing contract for the buyer. “The history of such deals tells us that whoever buys a captive gets guaranteed business from the owner. I don’t think these buyers will buy without a guarantee of business,” said an analyst with an IT research and advisory firm, who did not wish to be named.

Precedents for a deal of this nature include Citi’s sale of its back-office arms Citigroup Global Services and CITOS to TCS and Wipro, respectively, and Aviva’s sale of its captive to WNS. In each case, the deal was accompanied by a multi-year outsourcing contract with the parent company.

AIGSS was set up as a joint venture company where AIG held 80% and Polaris Software Lab held the rest. Polaris incubated this company by sharing its physical and communication infrastructure and processes. But, when Polaris signed a professional services agreement with AIG Global Services last year, it sold its stake in AIGSS.