Carnegie Fonder, a long-term shareholder in Persistent Systems since 2021, has published an open letter to the mid-tier IT services company's promoter and CEO, raising pointed questions about its planned €1.27 billion ($1.45 billion) acquisition of German digital engineering firm Nagarro.
In an open letter on professional networking website LinkedIn, portfolio manager Gunnar Pahlson questioned the logic of paying a 140% premium for a slower-growing, lower-margin European business exposed to cyclical industrial and automotive clients, including accounts tied to Lufthansa and Volkswagen.
Pahlson's letter raises nine questions, including why Persistent would pursue a business facing structural headwinds in European autos and IT services broadly, whether capital could be better deployed organically given Persistent's own growth record, and how the deal's economics justify higher leverage given uncertain returns on invested capital.
Nagarro's most recent full-year results showed revenue growth slowing to 2.8% in euro terms (6.1% at constant currency) for 2025, with adjusted Ebitda margin easing to 13.8% from 15.1% a year earlier, partly reflecting foreign-exchange effects on intra-group loans.
The investor also flagged that Persistent has said it will not pursue full legal "domination" rights over Nagarro under German law for two years after closing, and questioned Nagarro's reliance on a small group of founders for its client relationships and growth.
Alongside this, Pahlson praised Persistent's track record of 25–30% annual revenue growth and Ebitda margins of around 14-15% in recent years, as well as its ambition to grow revenue from $1.6 billion to $5 billion within five years.
This comes days after Persistent Systems’ CEO and MD Sandeep Kalra, defended its largest acquisition plan through a series of investor meetings, including speaking to ET, stating that the shareholders will be taken care of through growth.
Last month, Persistent announced an all-cash offer of €81 per share, alongside a binding agreement to buy a roughly 21% stake from Nagarro's largest shareholder. The deal, financed with external debt secured from Barclays, would create a combined group with roughly $2.9 billion in annual revenue and more than 46,000 employees, positioning Persistent with meaningful scale in Europe, with revenue contribution to 22% from 9%.
Incidentally, after the announcement, Persistent Systems’ stock plunged to a 52-week low, wiping off Rs 8,353 crore on a single day.
Pahlson noted that Persistent's management is currently in a pre-results blackout period ahead of its first-quarter reporting, and said he welcomes a response once that period ends. The transaction, which still requires regulatory clearance from Germany's BaFin, is expected to close between the fourth quarter of 2026 and the first quarter of 2027.
