French technology giant Capgemini on Monday said it will acquire software services firm IGATE for $4 billion (€3.7 billion), in the largest buyout in the Indian outsourcing space so far.
IGATE’s revenues are about $1.3 billion, which means Capgemini will pay three times more for the acquisition. Though the acquisition looks expensive, especially since it comes at a time when the entire IT industry’s growth has slowed down, there are multiple benefits that Capgemini will hope to leverage.
The acquisition will help the $18-billion Paris-headquartered firm to strengthen its presence in the multi-billion North American market. While Capgemini gets most of its revenue from Europe, IGATE gets the majority of its sales from the US. With this, Capgemini’s employee base in India will increase from 50,000 to 80,000. The plan is to reach 100,000 by 2016.
These factors will help Capgemini compete with Indian firms such as TCS and Infosys as well as multinational rivals IBM and Accenture. “This is a ‘rich’ valuation but I guess they got what they were looking for (clients and employees),” said Ajit Deshmukh, Director, Equirus Capital.
The buyout, which trumps IGATE’s acquisition of Patni Computer Systems for $1.2 billion in 2011, will be financed through a combination of its own cash, debt and an equity portion that will not exceed a 6 per cent dilution of the company’s share capital. The merger is expected to enhance its earnings by 12 per cent in 2016 and 16 per cent in 2017.
Capgemini, which has companies such as Unilever and BAA as its clients, expects to post revenues of $22.5 billion at the end of the calendar year, still lower than Accenture’s $31.8 billion revenue in 2014.
The company had followed a similar strategy when it acquired Kanbay, an IT services company started by Indian and US entrepreneurs. That deal, in 2006, helped Capgemini enhance its presence in new geographies and verticals.
Partha Iyengar, VP and Head of Research – India, Gartner, said the IGATE acquisition would once again help Capgemini fill gaps in its existing business.
“Compared to Accenture and IBM, they were still a distant third and even more behind the global Indian providers. This acquisition levels the playing field to a large extent both in terms of capacity as well as breadth of coverage areas and verticals.”
In a telephone call, Capgemini Chairman and CEO Paul Hermelin said Ashok Vemuri, the current CEO of IGATE, would continue to head the firm. He also said that there would be no layoffs.