Capgemini delivers a strong half year, but will Elliott Management drive up the cost of acquisition plans?

Profile picture for user slauchlan By Stuart Lauchlan July 31, 2019
Capgemini's doing well in 2019, but there's an acquisition issue looming...


As the latest deadline for the UK’s planned exit from the European Union (EU) draws closer, one phrase that’s crept into certain media circles is that of “despite Brexit’, used by both those pro and anti quitting.

It’s one that might be applied to French services giant Capgemini which picked out as “remarkable” the performance of its UK arm when it reported half-year numbers yesterday. The UK and Ireland region now account for 12% of total revenues of €7 billion, up 8% year-on-year to €849 million.

The UK public sector, in particular, is performing well - possibly a matter for regret for those who’d assumed that the day of the ‘Big IT’ suppliers was over - while financial services was also cited as a winner for the first six months of the year. (Whether the same can be said in six months time if a No Deal Brexit takes place remains to be seen…).

The US remains the biggest revenue contributor (32% of total) while the domestic French market was up 6.9% year-on-year to represent 22% of the whole.

The Applications and Technology business remains the largest arm, delivering 71% of total revenues, followed by Operations and Engineering on 22%. One significant stat pitched by CEO Paul Hermelin is that for the first time Digital and Cloud business makes up more than 50% of revenue across the board, with cloud activities showing a 40% year-on-year growth rate, while the less-well-established AI practice is growing at 70% per annum.

To support such growth, Capgemini has doubled down on four main strategic partners - AWS, Salesforce, Microsoft and SAP. This is delivering positive results, according to Hermelin:

Year-on-year, we doubled our bookings with Amazon Web Services. Our bookings with Microsoft increased by more than 70%, and we won the 2019 Microsoft SAP on Azure Partner of the Year for demonstrating excellence, innovation and implementation of customer solutions based on Microsoft technology.

In terms of customers themselves, the firm referenced a number of wins in its post-results analyst call including:

  • Swedish bank Skandiabanken where Capgemini has delivered a new “lending user experience, mortgages lending platform, specifically designed to reduce decision time and to increase transparency for its customers”.
  • Airbus where Capgemini has signed a Skywise Partners program agreement to support digital transformation work across the 80 airlines worldwide that are connected to Skywise.
  • Groupe PSA where Capgemini is the preferred partner to design and build the SAP S/4HANA global core model.
  • Dijon Métropole in France where the firm has implemented a Smart City project to support new services for citizens under modernizing public asset management.
  • Virgin Voyages where Capgemini designed a CRM platform allowing the Virgin crew to identify each of the sailors, as they call to customers, and understand their individual preferences.

Altran and Elliott 

Looking ahead, attention will be focused on the €3.6 billion bid for  French consultancy rival Altran Technologies, which specializes in engineering and R&D services. When the acquisition plan was announced earlier this month, Capgemini talked in terms of creating a  €17 billion run-rate firm with a headcount of more than 250,000 people, one that would also assist with US expansion ambitions.

It might not turn out to be quite so simple as hoped, but Hermelin was clear on the rationale for the deal:

Altran’s business is closer to the business strategy of clients. There are clients that still think, in spite of digital, that IT is an enabling function, where, with Altran, it’s clear we move to the core business strategy and priorities.

He added: 

Our strategy is to stand as a strategic partner to the CxO, notably around digital marketing and Intelligent Industry. With this context in mind, Altran is a major step to accelerate our ambition in Intelligent Industry. This combination is of strategic nature and is based on the value creation resulting from the anticipated convergence of IT, information technology, and OT, Operations Technology, to accompany manufacturing and technology clients in their digital transformation.

It’s a sound enough thesis, so what could go wrong? Step forward Elliott Management, recently causing a stir due to their investment plans at SAP.  Elliott has also been building a position in Altran via its Elliot Capital Advisers arm and, according to a filing with the French market regulator AMF, doesn’t seem inclined to support the Capgemini bid, at least not at the current price.

For his part, Hermelin says the offer price is regarded as a fair one:

After negotiation, we arrived at the offer price of €14 per share. It is based on our assessment of the business prospect, our due diligence and the planned execution risks. It represents a premium of 33% over the three months VWAP (Volume Weighted Average Price) after a strong rally since the beginning of the year.

We think it’s an attractive price for Altran shareholders. It was unanimously approved by the Altran Board of Directors. We expect to set the tender offer acceptance threshold at 50.1%. That’s the level required to achieve control, implement our strategy and achieve the transaction benefits…we think this price is attractive and we have said that our aim is to reach 50.1%. And we are quite confident we will reach that point with the current attractive price.

Elliot has yet to comment publicly.

My take

While not directly referencing Elliott, Hermelin made an interesting remark around the Altran bid after confirming that the goal is to get to 50.1% share ownership. Asked if Capgemini is prepared to accept a tiny majority and a large minority ownership split, his response was:

I think we can deliver our strategy that way.

Clearly, from Capgemini’s point of view that would hardly be ideal. However, this is a major acquisition that the firm is teeing up. Whether Elliott can force the firm to up the bid price remains to be seen, but the firm’s track record is one that Capgemini execs need to take a look at. The aim is to close the deal by the end of the year. Who blinks first? Watch this space.

Overall it’s been a strong first half for Capgemini, but there are a lot of macro-economic factors that will be in flux in the second half, not least the impact of a No Deal Brexit - not just on UK business prospects, but what the knock-on effect would be on the wider EU economy. For now, though, the firm’s delivering the goods, despite - as the saying goes - Brexit.