Smaller rival will buy Keane

Sixteen days after naming a chief executive to end nearly a year of leadership turmoil, Boston technology services firm Keane Inc. yesterday surprised analysts -- and its employees -- by agreeing to be acquired for $854 million by a private equity-backed buyer.

Kirk E. Arnold , who left Fidelity Investments in January to become Keane's vice chairman, president, and chief executive, will be the third senior executive to depart from the company in nine months when its smaller acquirer, Caritor Inc., of San Ramon, Calif., completes the purchase.

The deal is expected to close in the second quarter.

Keane shareholders will receive $14.30 per share in cash, a 19 percent premium over the $12 closing price on Tuesday. The shares vaulted $2.03, or 16.9 percent, to $14.03 yesterday.

The combined company, with over 14,000 employees and anticipated yearly sales of more than $1 billion, will be based in San Ramon, though its US operations will be run out of the current Keane headquarters near the USS Constitution in Charlestown.

It will retain the Keane name, the better known brand in the outsourcing business.

But its chairman and chief executive will be Mani Subrananian , the founder of Caritor, which has the bulk of its operations and 3,000 of its 3,900 employees in India. Marv Mouchawar , executive vice president for Caritor, said the two companies are complementary, with Keane bringing its brand name and customer base and Caritor its entrepreneurial management and low-cost business model. Speaking of the Boston-area operations, which employ 600 people, Mouchawar said, "It will grow as the market demands."

The power in the new company will rest with its private equity backer, Citigroup Venture Capital International, which is investing $350 million in Keane, according to an executive close to the deal makers. An affiliate, Citigroup Global Markets Inc., provided debt financing for the deal, along with UBS Securities and Bank of America Securities.

Peter A. Allen , partner and managing director of the TPI consulting firm, which advises companies on outsourcing, said the Keane deal could mark the first step in a Citigroup plan to buy other small and mid-size outsourcing and technology services firms. Caritor has made four smaller acquisitions worldwide since 2005.

"Keane has a good pedigree and a good delivery model if they have a broader roll-up strategy in mind," Allen said. "Maybe it starts with Keane and progresses to other similar-size offshore service providers. By themselves these companies are still small by industry standards. And the world doesn't need another tier-three services provider."

Of its more than 10,000 employees worldwide, about 600 work in Massachusetts, with 350 at its Boston headquarters. Keane's largest customer base remains New England, though it has been building operations in India and other countries in recent years to fend off competition from Indian outsourcing giants like Wipro and TCS and global rivals like IBM and Accenture.

The transaction was approved by the boards of both companies, including the family of Keane's chairman, John F. Keane Sr. , who founded the company 41 years ago above a Hingham doughnut shop. Keane family members continue to own 20 percent of company shares. Neither John Keane nor any other senior executives would discuss the deal yesterday.

Keane spokeswoman Veronica Kido confirmed that Arnold, the current chief executive, would be leaving. Kido said the post-merger role of other senior managers is undetermined. "Further information on the structure of the company will be announced in due course," she said.

Former chief executive Brian T. Keane , the founder's son who resigned May 10 after two female employees accused him of sexual harassment, yesterday said he supported the acquisition.

"It's a very positive outcome for clients and for employees," Keane said. "Just getting out of the public spotlight and being able to focus on serving clients and running the business will be good."

Brian Keane in May denied the harassment allegations, though the company released a statement saying he'd admitted to exercising poor judgment. The company ultimately paid $1.14 million to settle one complaint and an undisclosed sum to settle the other. But the episode has continued to cast a shadow over the company.

Throughout last summer, the company was run by three executives in an "office of the president," with analysts anticipating that one of the trio, Richard S. Garnick , would succeed Brian Keane. But on Sept. 29, the company said it had fired Garnick for unspecified travel expense violations and unauthorized communications. Garnick denied he'd done anything wrong and sued the company for breach of contract.

The case is pending in Suffolk Superior Court.

Analysts differed yesterday on whether the sale, which effectively takes Keane private, represents a fair price for investors.

"It's a sweet deal for the Keane shareholders," said John C. McCarthy , vice president of research at Forrester Research in Cambridge.

"But I think management of the combined company is going to struggle mightily. I'm not sure Caritor has the management depth to deal with the problems that Keane is struggling with right now."

But in a note issued yesterday, Edward S. Caso Jr. , managing director of Wachovia Capital Markets, suggested Keane should have commanded a higher premium.

"We are very surprised by the deal announcement as the company is in the midst of a transition and earnings power is depressed," he wrote. "We are equally surprised that the board . . . agreed to the valuation, which we believe is low."

Robert Weisman can be reached at weisman@globe.com.