Capgemini to spend $4 billion for iGate to raise US profile

Profile picture for user slauchlan By Stuart Lauchlan April 27, 2015
Summary:
Capgemini's $4 billion gambit for iGate has pluses and minuses ahead.

Paul Hermelin, Chairman and CEO of Capgemini
Paul Hermelin, CEO of Capgemini

A new status on the American market.

That’s one of the drivers behind French IT services firm Capgemini splashing out $4 billion in cash to buy US-headquartered Indian outsourcing giant iGate.

iGate pulls in around 80% of revenues from the US at present, while North America was Capgemini’s strongest region in its first quarter, growing 34% year-on-year (with a bit of help from a strong dollar v Euro).

Assuming the deal closes in the second half of the year, the US will make up 30% of combined 2015 revenue of €12.5 billion.

Hermelin said Capgemini regards the US as the most innovative services market in the world:

The market knew we were looking to diversify our geographical mix. Capgemini is a very European-centered company, 70% of our revenues, so we were mainly looking at a US acquisition. The US is the most vibrant market for IT and services and it’s the market where innovation starts.

The merger will also boost Capgemini’s financial services clout as 42% of iGate’s revenues come from the finance sector, he added:

This will reinforce our financial services footprint with some of the top logos in insurance and banking.

Finally the merged company's Indian footprint will lead to advances in industralization of services:

It’s a big step forward in industrialisation. Together we will have 80,000 people in India and will soon get to 100,000. With that kind of number, you are no longer a challenger, you are a dominant player.

The two companies made the announcement as Capgemini reported first-quarter results, with revenue up 10.5% in the three months to March 31, to €2.76 billion.

Hermilin also took time to deny rumours that Capgemini would take iGate private:

For us iGate is a strategic play. We do not want to take iGate private.

Good move?

So, a bold move by Capgemini and one with a high ticket price. But a good one? Overall, services markets analysts come down in favor

Sarah Burnett, VP at The Everest Group, says that as well as the increased US footprint, there are other obvious benefits to the deal:

It enhances Capgemini’s delivery presence in offshore/low-cost regions specifically India, where most of IGATE’s 33,000-strong workforce is based…Around two-fifths of Capgemini’s global workforce of 144,000 employees is based in India, with the combined group having an offshore leverage of nearly 55% by the end of 2015, comprising over 90,000 people.

She also points to IGATE’s Integrated Technology and Operations (ITOPS) business model which she argued will help Capgemini’s play as an integrated service provider:

As the value proposition in the global services space moves beyond labor arbitrage, service providers are looking at non-linear IP-driven revenue sources through products, platforms, and solutions. IGATE has monetized the ITOPS value proposition through productized applications and platforms – IDMS (for BFS), IBAS (for TPA clients), and SIB (for retail customers) – which are distinct P&L-plays for the company.

Ashok Vemuri, CEO of IGATE2.11.19
Ashok Vemuri, CEO of iGATE

Over at Horses For Sources, Phil Fersht takes a similar view:

Capgemini has historically been a horizontally-oriented BPO service provider with a comparatively limited vertical capability, offering a proven market leading F&A capability, but less impressive in industry-specific BPO areas. iGATE brings  real depth in financial services vertical BPO, especially insurance, where the firm been making investments for the last several years as a TPA and a provider of transactional services.

He adds:

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.

But Burnett does point to potential cultural pressures that could cause problems:

The adage “culture eats strategy for breakfast” couldn’t be truer for this merger. There is a stark cultural tension with a Europe-heritage firm struggling with offshoring trying to integrate an Indian IT service provider with a strong North American client roster.

Capgemini will need to bridge the inherent disconnect between two different cultures, systems, processes, and people, to make this integration successful.

Ferscht takes a similar tack that there may be bumps in the road ahead:

Net-net, we applaud the boldness of this move, and hope, for Capgemini’s sake, the French mothership can integrate the two firms effectively. However, we also hope Capgemini can quickly focus on some specific niches that have real As-a-Service elements so them, such as strong analytics depth in discrete functions, and further industry vertical strengthening. In addition, we are still awaiting the firm to pack its punch in automation and cognitive, where it is beginning to talk a big game, but needs to demonstrate some real investment plans.

My take

First impressions - a bold move that will doubtless result in further US market-centered M&A activity in the services space, but one with a combination of opportunity and challenges for Capgemini. Hermelin argues:

Capgemini has performed more than 40 acquisitions. Some of them went smoothly, some of them went a little tougher.

Time will tell which wins out this time.