Baring to buy IT outsourcing player Virtusa for $2b

The Virtusa board has endorsed a deal that will see Baring acquire all outstanding shares for $51.35 apiece, a 27% premium to the closing price on September 9, the last trading day before the offer was announced, according to a filing. The stock rose 24.4% on September 10 to close at $50.42 and remains around that level.

The deal came about after Virtusa received an unsolicited acquisition offer in July from an unspecified party. A month earlier, New Mountain Capital, which holds an 11% stake in the company, nominated three members for election to Virtusa’s board. New Mountain said it wanted to reinvigorate the underperforming business, citing weak margins, earnings volatility, low earnings growth, flawed management compensation, poor capital allocation, and poor corporate governance.

Virtusa responded to the offer by having its financial advisors reach out to potential strategic buyers and financial sponsors. Non-disclosure agreements were signed with five parties, and Baring emerged as the preferred buyer.

Founded in 1996 in Sri Lanka and headquartered in the US, Virtusa covers the entire spectrum of IT services, from consulting to technology and user experience design, application development, systems integration, digital engineering, testing and business assurance, and maintenance and support services. Its clients are Forbes Global 2000 companies in consumer-facing industries like financial services, healthcare, communications, technology, and media and entertainment.

The company has offices on five continents and operates delivery centers in the US, India, Sri Lanka, Hungary, Singapore, Poland, Mexico, and Malaysia. These delivery centers – the largest of which are in Hyderabad, Chennai and Bangalore in India and Colombo in Sri Lanka – account for nearly three-quarters of Virtusa’s total billable hours.

Baring has considerable experience in IT services, having made six investments in the space since 1998. Current portfolio companies include Hexaware Technologies and NIIT Technologies as well as healthcare IT specialists CitiusTech and AGS Health. The firm launched a $1.1 billion privatization bid for Hexaware – it already holds a majority stake – in June. Baring is investing its seventh pan-Asian fund, which closed at $6.5 billion at the end of last year.

“Technology is continuing to drive marketplace evolution at an unprecedented pace, creating new opportunities as well as complexities. Virtusa’s global team of talented professionals, software engineering heritage, and deep domain expertise position it uniquely to help enterprises across industries accelerate their most strategic digital and cloud transformation initiatives,” said Jimmy Mahtani, a managing director with Baring.

Virtusa generated $1.31 billion in the 12 months ended March, up from $1.25 billion a year earlier. Over the same period, net income rose from $17.7 million to $48.4 million, while operating cash flow increased from $68.6 million to $79.9 million. Baring’s purchase price implies a valuation of 16.2x EBITDA for the 12 months ended June.

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• Topics
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• Baring Private Equity Asia