What does Capgemini's acquisition of iGate mean?

The move gives the French IT services major a foothold in the lucrative North American market

Paris-headquartered IT services and software company Capgemini’s acquisition of IGate for over $4 billion is much more than just getting a stronger presence in India. 

The acquisition just shows how the European firms are getting aggressive to take the share in the global IT services market, which so far has been dominated by US players, Indian IT player. The sole company that has managed to be a serious contender to global players has been Accenture. The Ireland incorporated firm boost revenue of $30 billion in 2014, much ahead of both Capgemini and Atos. 

Capgemini is not new to acquiring India based companies. In 2006 it acquired Kanbay, which was headquartered in the US but had operation team based out of India. The acquisition then, one of the biggest, was done for $1.25 billion. Capegemini had given a 15.9 per cent premium to Kanbay’s shares then. 

But more than the valuation it was the strong foothold that Capgemini got in the banking industry. Kanbay boosted of clients such as Household International, Morgan Stanley among others. 

Despite the acquisition of Kanbay and then other targets, Capgemini’s growth in taking the bigger share of the US market was not as fast as compared to some of the Indian or MNC players. 

Rather European firms in the services sector have been a tad slow in taking on the outsourcing pie share. This is not only true for Capgemini, but also for its closest peer and competitor Atos. 

Atos too in a bid to diversify has over the past few years stepped on the gas on inorganic route. It recently signed a deal to acquire Xerox’s ITO business for $1.05 billion. This acquisition while tripled its US revenues it also enhanced its presence offshore capabilities. The acquisition gave the company centre in India, Mexico and Philippines. 

“IGate is a good strategic fit for Capgemini it is of a size big enough to move the needle yet small enough to absorb. Capgemini is better positioned to absorb IGate than it was the EY consulting practice,” said Peter Bendour-Samuel, CEO, Everest Group.

With IGate Capgemini will further up its share in the US. According to the company’s release the acquisition grows its presence in North America, it is at the top of the Group’s strategic agenda. The combination of IGATE and Capgemini increases the group’s revenues in the region by 33 per cent to an estimated $4 billion, making North America its first market with approximately 30 per cent of the pro-forma combined revenues in 2015. An estimated 50,000 employees will be servicing Capgemini’s North American clients. 

Analyst however, feel that Capgemini should focus on acquiring newer technology that will give it a niche focus. “Most of the leading service providers today are looking at niche buys that specifically add software IP or a vertical capability, such as Cognizant/Trizetto, or Infosys/Panaya  However, in Capgemini’s case, there are still some significant holes in its portfolio to fill out, most notably a more powerful presence in India, a stronger portfolio of US enterprise clients, and a deeper foothold in financial services.  iGATE brings these to the table. Net-net, we applaud the boldness of this move, and hope, for Capgemini’s sake, the French mothership can integrate the two firms effectively,” said Phil Fersht, CEO of US based HfS Research in his blog.  

But industry experts are also saying that merger of these companies will be crucial for the success. “Integration will be challenging with two very different cultures. It has recent experience gained from the successful acquisition of Kanbay and a growing Indian presence. Over all this is a nice move but will require Capgemini to move quickly to successfully integrate IGate and stem any talent losses. It also points to the growing momentum of industry consolidation and will not be the last such move,” added Bendour-Samuel. 

That is perhaps one of the reasons why Capgemini wants to continue to keep IGate listed on Nasdaq as well as continue with the branding. “For us IGate is a strategic play. We do not want to take IGate private,” said Paul Hermelin, chairman and CEO of Capgemini.