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The Paris-headquartered Capgemini has announced the acquisition of New Jersey-based IGATE, which has operations in India, for $4 billion in cash. The markets gave a thumbs up to the acquisition: While the Capgemini stock was up 7.6 per cent, the IGATE stock opened 3.45 per cent higher on Monday.
The deal, one of the largest in the Indian information technology sector, will see the exit of IGATE co-founders Ashok Trivedi and Sunil Wadhwani, along with private equity firm Apax Partners. It will also bolster the offshore presence of the European infotech services giant, giving it access to a larger global delivery network and strong presence in the US financial sector.
The deal will be financed through cash, debt and sale of new shares, which will dilute existing shareholdings by no more than six per cent. Capgemini is offering $48 a share for IGATE, a 4.7 per cent premium to the stock's closing price on Friday. (GLOBAL HEADCOUNTS)
In India, Capgemini's headcount will rise to 90,000, following the addition of IGATE's 30,000 employees. The company crossed the 100,000-employee mark at its global delivery centres this year.
The deal will be immediately accretive to Capgemini's operating margin and earnings per share. It will have a positive impact of one percentage point on margins. The acquisition will provide Capgemini offshore capabilities to compete with IBM, Accenture and large Indian infotech services players. The Dublin-based Accenture has about 100,000 employees in India, while IBM crossed the 100,000 mark a long time ago.
"Capgemini has been investing in a more compelling global delivery offering, starting with the Kanbay acquisition. However, compared to Accenture and IBM, they were a distant third. This acquisition levels the field in terms of capacity and breadth of coverage areas," said Partha Iyengar, vice-president and head of research, Gartner.
Another advantage for Capgemini will be access to the North American market. The continent will represent 30 per cent the group's estimated combined revenue of €12.5 billion this year. This makes North America the largest market in terms of contribution to Capgemini's revenue.
Paul Hermelin, chairman and chief executive of Capgemini, said, "Our revenue from the US before the acquisition was about 20 per cent and that was not a desirable mix. We had told the market we were looking at the US for an acquisition." The acquisition will provide revenue synergies of $100-150 million and cost synergies of $30-40 million annually, to be achieved within three years.
Hermelin added there were no plans to delist IGATE from the Nasdaq. Rather, the Capgemini US subsidiary will be merged into IGATE. Capgemini said Ashok Vemuri, chief executive of IGATE, would continue in his present role, at least till the integration was completed. Analysts were divided about the acquisition. Many questioned the move, especially as it came at a time when the sector was moving towards technology such as big data and cloud computing.
"The hurdle ahead is integration. Capgemini's record with Kanbay was not a big success and it needs to do better this time. It will have to move quickly to convince clients that projects are safe and the acquisition gives IGATE's clients a bigger capability and deeper domain expertise," said Iyengar.
Sudin Apte, chief executive and research director, Offshore Insights, said the integration would take time. "This might be a $300-500 million revenue opportunity for Indian players such as TCS, Infosys and Tech Mahindra," he added.