IGATE valued around 15 times of Ebitda

Experts say valuation is on the higher side, but makes sense for Capgemini

French consulting and information technology (IT) services firm Capgemini’s proposed acquisition of Nasdaq-listed IT services company IGATE is part of the consolidation happening in the IT and business process outsourcing services space, according to experts. While some say the cost of the acquisition could be on the higher side, most experts agree that for Capgemini, which has been trying to increase its presence in North America — a key IT spending region — it is the right move to enhance its delivery capabilities in India.

Capgemini has agreed to pay a little more than three times IGATE’s sales reported in 2014. Capgemini will offer $48 for every share of Igate, which is a premium of 4.7 per cent on the latter’s closing price last Friday, and 16 per cent compared with the past three months’ average share price.

“If you look at the valuation, it is more than three times IGATE’s revenues, which in my view is a rich valuation. We don’t often see such valuation in the traditional IT services space. But considering the value that Igate would bring to the table, it makes sense for Capgemini to do the acquisition,” said Ajit Deshmukh, director, Equirus Capital.

The $4 billion that Capgemini has agreed to pay for this acquisition is 14.5X of IGATE’s earnings before interest, taxes, debt and amortisation (Ebitda), which stood at $276.4 million in 2014. “It (Capgemini) appears to have paid a significant premium for doing so,” said an industry analyst who did not wish to be quoted.

Even though Capgemini has a strong offshore delivery presence in India, it has been trying to catch up with some its larger industry players such as IBM and Accenture. Ever since it entered India, following its global acquisition of the consulting business from Ernst & Young in 2000, Capgemini has been expanding its offshore delivery presence, mostly organically, except for the acquisition of Kanbay in 2006.

“IGATE is a good deal. It has been valued based on profitability and growth prospect. It is 19 per cent over 90 trading day,” said Pierre-Yves Cros, chief development officer at Capgemini Group. “What we also saw is the synergy with the company. The cost synergy will bring in savings of $30-40 million while the operating model synergy will bring in savings of $45-65 million. If you go back to our Kanbay acquisition, we doubled the revenue despite the fact that we were in a downturn then,” he added.

“This acquisition is a continuation of the overall theme of consolidation in the global IT/BPO space,” said Amit Singh, executive director, head IT and co-head outsourcing at Avendus Capital. “It will significantly enhance Capgemini’s footprint in North America and give a boost to their offshore-based economies of scale,” he added.

According to Capgemini, the combined entity increases the group’s revenues in the North America by 33 per cent to an estimated $4 billion, making the region its first market with approximately 30 per cent of the pro-forma combined revenues in 2015.

North America currently is the largest market for Igate, which represented 79 per cent of its revenues in 2014 followed by Europe at 14 per cent.

The deal will also significantly expand Capgemini’s presence in the financial services segment, which at present accounts for 42 per cent of IGATE’s overall revenues.

“While the acquisition will help Capgemini to improve its margins, extend its foot prints in the BFSI (banking, financial services and insurance) segment and get access to clients like GE — which eluded them for two decades — the daunting task would be blending the two companies, especially in India,” said Sudin Apte, CEO and research director at Offshore Insights.

Apax Partners to exit with 2.5X returns

The deal would also see Apax Partners, which supported IGATE during its acquisition of Patni Computer Systems, exiting the company with two-and-a-half times returns.

In 2011, when the then Phaneesh Murthy-led IGATE went ahead with its plan to acquire Mumbai-based Patni, it had roped in Apax as one of the investors to part-fund the $1.2-billion buyout.

Apax had invested $480 million in the form of debt which it subsequently converted into equity. It was the largest shareholder in the company with 28.91 per cent stake, followed by the company’s founders, Sunil Wadhwani and Ashok Trivedi, who jointly hold close to 26 per cent.

WHAT IGATE ACQUISITION MEANS FOR CAPGEMINI

• Combined revenue of €12.5 billion in 2015, with an operating margin above 10% and around 190,000 employees
• Will get a strong footprint in financial services space that accounts for over 42% of IGATE’s revenues
• Gets a platform into newer areas like engineering and platform-based services
• To improve its revenue share in North America to around 30 %
• Gets access to some of the large clients like General Electric which eluded them till now
• Will get a strong offshore delivery presence in India