By Paul Mozur
In an interview with The Wall Street Journal on May 10th, the chief executive of China’s largest software outsourcing company Pactera Inc. PACT -1.04% said investors had been pestering the company “every day” to carry out share buybacks to bolster the company’s share price.
“Our shares are trading very badly, it’s at a multiple that I can’t even imagine,” CEO Tiak Koon Loh said during the interview.
Since that interview, Mr. Loh, along with Blackstone Inc. BX -0.58% and several other Pactera executives, decided to try to cash in on that low price with a bid to take the company private for $7.50 a share or a 42.5% premium to where shares closed Friday on the Nasdaq Stock Market NDAQ -0.19%.
Following on the heels of a bid by a CITIC Capital Partners-led consortium to take private another Chinese IT services company AsiaInfo-Linkage Inc. ASIA -0.17%, the Pactera deal has led bankers and commentators to wonder whether the recent trend of private equity firms jumping to take Chinese companies listed in the U.S. private is looking a little frothy.
“The [Pactera] deal may go down in the annals of most expensive [leveraged buyouts] ever launched. Blackstone is offering current shareholders a price equal to over 200 times 2012 net income,” said Peter Fuhrman, chairman of China First Capital.
Nonetheless, in the interview before the deal, Mr. Loh laid out his reasoning for why Pactera has good growth potential ahead of it. In particular, he said the company stands to benefit over the next decade, not just in the industry of software outsourcing, but also in tech consulting services as China’s technology industry booms.
For example, Pactera partnered with Microsoft Corp. MSFT -1.33% and 21Vianet Group Inc. to help develop Windows and Office cloud services in China, which launched on Wednesday. Mr. Loh said that the company has a number of other cloud projects it is working on, in particular helping provincial governments build cloud infrastructure.
“China has always grown faster than the global [outsourcing] market,” Mr. Loh said.
But there are reasons to be more bearish on Pactera, especially in the short term. With more than 10% of its revenues coming from Japan, the company is likely to be hit hard this year by the falling Yen, according to Mr. Loh.
“Everything you do is in Japanese Yen, and every contract is signed in Japanese Yen, and it has just dropped 25%,” he said, adding that business has grown despite recent political difficulties between China and Japan.
Another issue is integration. Pactera was formed by the 2012 merger of HiSoft Technology International Ltd. and VanceInfo Technologies Inc. Mr. Loh acknowledged that there had been some “leakage” of productivity as the two companies work to integrate cultures and some employees or teams had left, but he nonetheless said that he expected growth to return.
“But beyond this year and getting back to the norm we should see ourselves growing…. no less than the industry and no less than the industry is at least 16% [revenue growth] year on year,” he said.
More than just saying it, Mr. Loh is betting on it. Now it’s a matter of whether shareholders believe that kind of growth in the coming years could get them more than the $7.5 per share on offer from the deal.
Blackstone did not immediately return calls.