VanceInfo, HiSoft Technology To Merge As Equals In $875 Mln Stock Deal

8/10/2012 9:33 AM ET

Chinese IT companies VanceInfo Technologies, Inc. (VIT: Quote) and hiSoft Technology International Ltd. (HSFT: Quote) agreed Friday to a merger of equals in a deal that will create the largest China-based offshore IT services provider with a combined equity value of about $875 million.

The merger, approved by boards of both companies, is expected to close in the fourth quarter of 2012. The deal is primarily subject to approvals by VanceInfo and hiSoft shareholders.

"The joint company can take advantage of the strong market growth opportunities while continuing to attract the best people. Our broader scope of capabilities leveraged across a deeper sales force will also open ample new business development opportunities," VanceInfo Founder, Chairman and CEO Chris Chen said in a statement.

Under the all-stock deal, each VanceInfo ordinary share will have the right to receive one common share of hiSoft, while each VanceInfo American Depositary Share or ADS, representing one ordinary share, will have the right to receive one hiSoft ADS.

Prior to the merger, hiSoft will effect a share consolidation and change the ADS to ordinary share ration to ensure that both the companies will have the same number of shares and ADS' while merging.

Following the closure of the deal, shareholders of VanceInfo and hiSoft will each own about 50 percent of the combined company, with hiSoft being the surviving company. hiSoft shares will also continue to be listed on the Nadsaq under a new name given to the combined company with expected 2012 revenue of over $670 million.

The combined company will be led by current hiSoft CEO Tiak Koon Loh, while Chen will assume the role of non-executive chairman. The eight member board of the combined company will consist of four directors each nominated by VanceInfo and hiSoft.

The companies expects potential cost synergies from the merger to reach 2 percent of combined revenues within 18 months. The merger is also anticipated to be accretive within the first 12 months following the completion of the merger.

Separately, VanceInfo Technologies reported second-quarter profit of $4.68 million or $0.11 per share, down from $7.14 million or $0.16 per share a year ago. Adjusted earnings per share dropped to $0.19 from $0.21 a year ago. Net revenues grew to $94.74 million from $68.25 million last year. On average, 7 analysts polled by Thomson Reuters expected the company to report earnings of $0.20 per share on revenues of $91.29 million. Analysts' estimates typically exclude special items.

Looking ahead to the third quarter, VanceInfo expects adjusted earnings in a range of $0.18 to $0.20 per share, on projected net revenues between $95 million and $97 million. Analysts expect earnings of $0.25 per share, on revenues of $93.72 million.

For fiscal 2012, VanceInfo lowered its adjusted earnings guidance to a range of $0.75 to $0.81 per share from the prior forecast of $0.86 to $0.92 per share, while raising revenue guidance to between $372 million and $376 million from the previous forecast of at least $368 million. Street is looking for full-year 2012 earnings of $0.87 per share on revenues of $369.17 million.

In another release, hiSoft Technology reported second-quarter profit of $6.37 million or $0.20 per ADS, up from $3.93 million or $0.12 per ADS a year ago. Adjusted earnings per ADS increased to $0.30 from $0.18 a year ago. Net revenues grew 41.1 percent to $71.8 million from last year. Analysts expected the company to report earnings of $0.29 per share on revenues of $71.29 million.

Looking ahead to the third quarter, hiSoft expects adjusted earnings in a range of $0.31 to $0.32 per ADS, on projected net revenues of at least $77 million. Analysts expect earnings of $0.31 per share, on revenues of $76.36 million.

For fiscal 2012, hiSoft raised its adjusted earnings guidance to a range of $1.20 to $1.23 per ADS from the prior forecast of $1.18 to $1.21 per ADS, and also raised revenue guidance to be now at least $297 million from the previous forecast of at least $295 million. Street is looking for full-year 2012 earnings of $1.20 per share on revenues of $293.64 million.

HSFT closed Thursday's regular trading session at $11.88, up $0.13 on a volume of 88,700 shares, VIT closed at $9.94, up $0.58 on a volume of 0.32 million shares.