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Patni Computer Systems (NYSE:PTI) seems to be using the acquisition route to grow, acquiring ZAiQ Technologies, a design and verification company, in Woburn, Mass. With this acquisition, Patni’s product engineering service becomes stronger through the addition of ASIC design, verification and validation expertise (source: corporate press release).

Patni is already in product engineering services, but now it seems they want to strengthen their hold and get a bigger pie slice in terms of revenue from this sector. According to a NASSCOM 2006 strategic survey report, Indian IT and ITES export revenues from engineering, R&D and offshore product development have grown tenfold from $300 million in 2001-2002 to over $3.1 billion in FY 2004- 05, and are projected to reach $3.9 billion by the end of fiscal year 2005- 2006.

Patni wants to make sure it is at least among the top 3 in this sector. Through the transaction, Patni obtains ZAiQ’s Application-Specific Integrated Circuit [ASIC] design capabilities and Intellectual Property [IP], as well as expertise in Field-Programmable Gate Arrays [FPGA] and System-on-a- Chip [SoC] technologies.

I like this deal for Patni, and all we can say is that Patni is walking in the footsteps of Infosys (NYSE:INFY) towards becoming a future EDS or Accenture. All these Indian software companies are working on a similar plan and taking inspiration from the success of Infosys and TCS. First, they develop in-house expertise and then go on a global expedition to acquire the expertise which they lack, thus becoming a software company with a range of service offerings from integration, development, implementation and maintenance to outsourcing done by a single company.

These companies have every bit of advantage over their western counterparts, be it cost, quality, skilled manpower or time zone difference. The future belongs to these companies and anyone betting on software should have at least one of them in their portfolio, because it's always better to catch them young and watch them grow than to pick them up after the cat's out of the bag.

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In other news, a story on Patni appeared in the IndiaTimes yesterday. It seems that due to a tax review which would entail additional tax liabilities of $23 million to $33 million, Patni computer will have to restate its results for 2003 and 2004.

The company will make a provision for additional tax and other related liabilities in its unaudited financial statement for the quarter ended June 30, 2006. Patni continues to underperform since its listing on the NYSE.

PTI-INFY comparison chart since Dec '05 (when PTI went public on the NYSE):

PTI-INFY comparison chart

Source: Patni Computer: Three Steps Forward, Two Steps Back (PTI)