Cap Gemini to Buy Igate for $4 Billion to Take On Accenture

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IGATE Green Building Noida.

IGATE Green Building Noida.

Source: Intap2007/Creative Commons

Cap Gemini SA agreed to acquire Igate Corp. for about $4 billion, giving Europe’s largest provider of computer services access to more financial customers as it expands in the growing U.S. market for information technology consulting.

Igate investors will receive $48 in cash per share, or 4.7 percent more than the stock’s April 24 close in New York, the companies said Monday. Cap Gemini, which is financing the purchase with a mixture of cash, debt and new stock, will add contracts with clients including Royal Bank of Canada and General Electric Co. to boost its annual revenue to 12.5 billion euros ($13.5 billion).

Cap Gemini rose 7.9 percent to 84.54 euros in Paris, the stock’s highest closing price in 13 years. Igate gained 3.3 percent to close at $47.36 in New York, reaching a 15-year high.

The deal marks a new chapter in the history of Cap Gemini, a competitor to Accenture Plc and International Business Machines Corp., and one of the five biggest computer-services providers in the late 1980s. It is the largest acquisition for the French firm since it bought Ernst & Young’s consulting business 15 years ago for about $10.5 billion.

India Staff

When completed, the deal will add about 33,000 staff to Cap Gemini’s 145,000, and boost the share of employees located in low-cost countries such as India, according to Sagar Rastogi, an analyst at Ambit Capital Pvt. The companies’ industry segments are complementary, with Igate’s two biggest client types -- financial services and industry -- also among Cap Gemini’s top three.

The acquisition will help Cap Gemini better challenge low-cost Indian service providers like Tata Consultancy Services Ltd. and Infosys Ltd., said Anurag Rana, an analyst at Bloomberg Intelligence.

European customers “are very, very serious about cost rationalization and changing their cost structure,” Rana said.

After the deal, Europe will account for no more than half of Cap Gemini’s total sales, Cap Gemini Chief Executive Officer Paul Hermelin said, compared with more than 70 percent last quarter including the U.K. and Ireland.

“It’s a geographic fit,” Hermelin said on a conference call.

Deal Multiples

Cap Gemini’s advance gave the company a market value of 13.8 billion euros. Shares of Accenture and IBM each gained less than 1 percent.

The transaction, approved by most Igate shareholders, values the company at about 17 times its earnings before interest, taxes, depreciation and amortization, compared with a median of 14.6 for similar deals, according to data compiled by Bloomberg.

The acquisition adds capacity as well as breadth of coverage areas, Partha Iyengar, Gartner’s head of research India, said in an e-mail. “The added huge bonus for Cap Gemini is that it gives them a great presence and foothold in the U.S. market, which has always been a challenge for them as a Europe-centric provider.”

Banking Customers

Cap Gemini struggled in the aftermath of the Internet bubble, turning to extensive restructuring as its credit rating got cut to junk and its stock fell near an all-time low about a decade ago.

Standard & Poor’s on Monday cut its long-term corporate credit rating for Cap Gemini to BBB from BBB+, citing the French company’s plan to finance the acquisition primarily with debt. This will “more than offset the deal’s modestly positive impact” on profitability and business position in the U.S., the ratings company said in a statement.

Corporate profits in the U.S. are near record levels, a condition that, coupled with improved business optimism, may drive IT spending for equipment, software and consulting work, according to Bloomberg Intelligence’s Rana.

The U.S. economy expanded at a 2.2 percent annualized pace in the fourth quarter, led by the biggest gain in consumer spending in eight years.

While the Paris-based company’s sales in North America increased about 12 percent in the first quarter, excluding acquisitions, they fell as much as 16 percent in some European markets like the U.K. and Ireland. Revenue overall grew 1.5 percent during the period, to 2.76 billion euros.

Outsourcing Services

“The North American market is doing really well -- it continues to surprise us in a good way,” Cap Gemini CFO Aiman Ezzat said during the call.

Igate, which got about 70 percent of its revenue from the U.S. last year, provides consulting and technology outsourcing services to companies ranging from banks to electronics-manufacturing and chemical companies. The Bridgewater, New Jersey-based company said in January it won 29 new clients, as sales last year increased 10 percent to $1.27 billion, accelerating from 7 percent growth a year earlier.

Cap Gemini said the purchase should boost adjusted earnings per share by at least 12 percent in 2016 and 16 percent in 2017. Together, Cap Gemini and Igate would have an operating margin exceeding 10 percent this year.

Cap Gemini said the deal will let it accelerate the use of tax losses it has carried forward in North America, resulting in an accretion to normalized earnings per share more than 12 percent next year and 16 percent in 2017.

Bank of America Corp. advised Igate on the deal, while Lazard assisted Cap Gemini.

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