Aztecsoft in sell-off talks with MindTree

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Bangalore, Dec 9: One of the bigger consolidation moves in the Indian IT sector may be at work, with the promoters of mid-tier software services company Aztecsoft seeking exit. The listed company in which e4e and Canaan Partners hold close to 33% stake has held exploratory merger talks with cross town peer MindTree Consulting amongst others, sources said.

The company, which clocked Rs 264 crore revenue last financial year, is believed to be looking at an enterprise valuation of around Rs 500 crore ($125 million). It is believed that Aztecsoft and MindTree, which has been scouting for inorganic growth, are holding direct parleys, sources added.
Aztecsoft has been looking at an exit route for quite sometime now either through a synergistic merger with a similar mid-tier company or a possible sell out. It had initiated discussions with a smaller Bangalore-based company for a possible merger but nothing came out of it, sources said. Aztecsoft could be holding talks with other potential suitors simultaneously.

When contacted, Aztecsoft said it could not comment on these developments as it was in the silent period as its third quarter results is due in about a week"s time. Aztecsoft"s stock, which had plummeted to 52-week low of Rs 46, has rebounded in recent weeks. On Tuesday, the stock closed at Rs 93.40 on BSE, down 2.1% over the previous day, giving it a mcap of Rs 420 crore.

Analysts said any potential suitor for Aztecsoft would most keen on acquiring its client base. People familiar with the development felt that there would not be much of integration issues if MindTree comes into picture as key management personnel in both the companies are familiar with each other. When contacted, MindTree said, “We would not like to comment on market speculation."

However, MindTree has already stated its intention of becoming a billion dollar company without providing a timeframe. This is likely to be achieved through an aggressive acquisition- led growth strategy.

Aztecsoft, which is largely focused on product engineering and testing services, has been experiencing certain unevenness in its revenues for the last couple of quarters, especially after one of its client Dendrite which was operating under a build operate and transfer (BOT) model moved out in December 2006.

For the second quarter of FY07, its revenue touched Rs 62.01 crore, showing a quarter-on-quarter (QoQ) growth of 5% with net profit rising by 37%. However, on an year-on-year basis its revenue dipped by 9% while the net profit declined by 40%.

The company reported Rs 38 crore net profit on a Rs 264 crore turnover during FY"07. Aztecsoft currently has an headcount of over 2,100 with an active customer list of 89 with three locations - Bangalore, Pune and Hyderabad.

Sources said that Aztecsoft has not been able to establish dominant position in the segment it operates, which is very critical for a small or mid-tier company to succeed in an increasingly competitive market. Further, the tightening macro environment for the IT sector, may have accelerated the promoters" exit plans.

In context, it may be mentioned that any transaction is likely to be preceded by unbundling of promoter holdings, as private equity fund Canaan"s stake in Aztecsoft is routed through its direct investment in e4e, which is another mid-tier IT services company.


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