Capgemini Buys iGate To Build Scale and Improve Margins

Will Buying A Failed Experiment Deliver the Value Corresponding To Price They Pay

 

Much talked Capgemini - iGate deal happens -

  • Capgemini to acquire iGate for about $4.0 Billion

  • Post acquisition, Capgemini will be $13B in revenue and improved margin of double digit

  • Capgemini now has more than 100,000 resources in low cost delivery network, 85000+ in India

  • The provider extends its BFSI footprint, has opportunity to enter new spaces like Engineering and Platform based services.

  • Capgemini now has clients like GE which eluded them for two decades

  • Daunting task of blending two companies – especially in India – of large size and distinct culture starts

Why Capgemini buys iGate -

  • To Increase the revenue represented by North America which will be nearly 30% of the total group revenue.

  • To enhance its presence and competitiveness across the geographies and increase its offerings in the key verticals

  • iGate clients will have a wider portfolio with the global reach

  • With Revenues combining their will be increase in the economic stability of the group

  • Will achieve EPS accretion of at lease 12% in 2016 and 16% in 2017

Why iGate sell out?

  • Without specialization, iGate has not been heading anywhere

  • Investor pressures to exit

  • Disillusion of iGate that 1B is not a real scale to fight out TCS, Cognizant on one side

  • With improved margins and better valuation, this is possibly best timing

  • Its employees would see this deal as better career option and will continue

How this deal will pan out?

  • Capgemini will surely see improvement in margin

  • Capgemini extends its marketing pitch against Indian camp and will try to improve win rate

  • Capgemini can offer higher GDM scale to its existing clients and high end services to iGate clients

  • Capgemini attempts to extend its focus on US, almost signaling offshore disappointment in Continental Europe

  • Will succeed to transfer (only) about 800M-1B in revenue (of 1.3B)

  • Investors – especially APAX – are biggest beneficiaries.

  • After total integration, today’s iGate will not be separately visible and it will be very difficult to assess true impact of this deal on fortunes of Capgemini, which otherwise is a complex, slow to change, and currently challenged company by changing IT services world ord er

Indian vendor camp not too worried about deal 

  • At 3.5B valuation, iGate was untouchable for Indians to acquire 

  • iGate shares all its clients with likes of TCS and Infosys and in fact, serves as a small provider in those accounts

  • Clients (like GE and RBC) that stayed clear from Capgemini so for and won’t get force marched to Capgemini because of acquisition

  • Product engineering clients too ($100M+ in revenue) won’t be comfortable with Capgemini, who has less presence in this space

  • Capgemini’s level of front end sophistication to position global delivery and culture will be a bottleneck in extending GDM traction

  • Competitive Indian Firms won’t mind this deal, in fact, smell opportunity to snatch business

  • 300-500 million revenue possibly up for grab for other providers, especially TCS, Infosys and Tech M

  • Combined entity with lower margins ( than that of TCS,  Infosys) and internal focus to settle things will lag in investments and focus on automation and next -gen solutions