Pentafour's shopping list has 8 companies - Views on News from Equitymaster

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Pentafour's shopping list has 8 companies

Oct 27, 1999

According to news reports, Pentafour Software has identified eight global infotech (IT) firms for acquisition. Pentafour Software and Exports differentiates itself from its software peers on the basis of large exposure to high margin multimedia business. It has a competitive edge in multimedia due to its excellent track record and long term relationship with global multimedia companies. It is one of the few companies worldwide that can produce complete content for multimedia-based movies. Of the eight companies that the company has identified for takeover, three are based in Los Angeles, and the rest are spread over Australia, Singapore, Japan and London. The company may not stop at these companies and is on the lookout for more acquisitions. It has outlined a budget of US$ 100 m for acquisitions.

These acquisitions will strengthen Pentafour's multimedia, e-commerce and entertainment businesses. The companies that have been targeted for acquisition are strong either in pre/post film production or in e-commerce/e-business.

Funding for these acquisitions will come from internal sources (US$ 40 m) while the balance will come from tapping the markets (ADR issue). The impressive performance of its peers (Infosys, Satyam Infoway) has encouraged Pentafour to tap the ADR route. Moreover, as some of its acquisitions are in and around the US, an ADR issue makes sense.

Pentafour's acquisition spree marks a growing trend in the software segment, where companies are identifying global IT companies operating in niche areas, to boost their revenues. Domestic companies realise that they can not sustain growth at current level of operations, and are looking overseas for acquisitions.

By being closer to the markets, these companies will be able to service their clientele more efficiently. They will also be able to intensify their marketing efforts and can leverage on their partner's clientele to grow in global markets. Market view:
Pentafour's stock has been trading at a discount to its peers largely due to poor management perception. However, the management has taken several steps (corporate governance, improved disclosures) to correct that perception. Significant rise in 2QFY2000 net profit (up 67% year on year) is another factor that has gone in the company's way. Therefore, the stock has been rated as a 'BUY'.

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