martinwolf Transaction Analysis

Financial Information

• Transaction Size: $4.6 Billion
• EV/LTM Revenue: 3.5x
• EV/LTM EBITDA: 17.2x

Transaction Facts

• French IT services company Capgemeni (CAP.PA) announced today that it was acquiring rival U.S.-based IT services firm IGATE Corp. (Nasdaq:IGTE) for $48 per share, a 5 percent premium over the company’s Friday closing price.
• According to the press release, the combined company will have revenue of 12.5 billion EUR for 2015 and an employee headcount of approximately 190,000.
• Capgemeni will fund the acquisition through a combination its own cash, a capital raise and debt. Its share price increased almost 8 percent Monday on news of the acquisition.
• IGATE’s share price has been steadily growing since its last earnings report on Jan. 20. After today’s close, the company is up almost 35 percent since markets opened on Jan. 21.

Buying Into a Large Market, With Cultural Concerns Looming

• Cementing An Already Strong Presence: Capgemini has called North America the most innovative technology and services market in the world. It is already Capgemini’s strongest region, where in the first quarter it experienced 34 percent revenue growth. With 80 percent of IGATE’s business coming from North America, this acquisition will see the region represent 30 percent of the combined group’s 2015 revenue, making it Capgemini’s largest market.
• Shortcut to Success: Acquiring IGATE provides a financial shot in the arm beyond its size alone. Capgemini expects the acquisition to grow its EPS by at least 12 percent next year and raise its operating margin (previously expected to be 9.5-9.8 percent) above 10 percent.
• Commoditization Threatens Space: On Friday, Infosys, another major player in the IT services industry, announced its Q4 earnings. The company, struggling with commoditization in its traditional services, reported revenue that was among its weakest in three years.
• Potential Cultural Issues Present Concerns: While this acquisition presents clear opportunities for Capgemini, we are concerned about the potential for cultural clashes. As a “national champion,” Capgemini is subject to greater political interference that may compromise IGATE’s effectiveness (see the fates of Alcatel-Lucent, Renault/Nissan and Danone for examples). If it were acquired by a British or American company, we would be more optimistic-but for now, we’ll be watching closely to see what happens.