27 April 2015
Technology | Update
Real Estate
Technology
Capgemini acquires iGate
Is IT Services ripe for consolidation?
Bucking the fashionable trend of hunting for innovative start-ups in and
around Digital, Capgemini (CAP FP) has gone ahead with the acquisition of
iGate for USD4b.
The deal improves CAP’s offshore competitiveness, but drives only marginal
increase in competitive intensity for well entrenched India-based providers,
in our view.
While incremental revenues in years to come will be dominated by Digital-led
capabilities, we believe there are still cost efficiency/service cross-sell
synergies to be had in mergers of traditional providers.
Such instances going forward may get accentuated, especially if one of the
two companies lags in newer technology areas.
Merger of two traditional IT Services providers
Capgemini (CAP) today announced the acquisition of IGate in what is among the
larger consolidations in the IT Services landscape. CAP is paying ~USD4b for the
transaction, at ~19x IGate’s consensus CY16 earnings and ~24x trailing earnings.
IGate’s CY14 revenue was USD1.3b, +10.2% YoY. The combined entity will have
a revenue of ~USD13b, 15% below TCS. The combined headcount will rise to
177,000 people, after adding 33,000 from iGate.
HP’s acquisition of EDS in 2008, which more than doubled the combined entity’s
services revenue to USD38b, remains the largest till date. In 2006, CAP had
acquired Kanbay for USD1.25b, which had a revenue rate of USD400m. In 2011,
IGate had acquired Patni Computers, with the rationale of developing skills to
compete in large deals.
The merger of two largely traditional IT Service providers is contrary to the hot
trend of service providers hunting to invest in innovative cloud-powered Digital-
led start-ups.
When IGate acquired Patni in 2011, the explained rationale of increasing
potential to win large deals made sense. But as cloud/Digital started to shape
the way clients think their IT budgets, such large multi-year deals are
increasingly becoming exceptions than the rule. In such a scenario, if there is an
overlap of multiple large accounts which could be up for renewal, it may make
sense for such a merger to help gain a more strategic and relevant foothold in a
client. But interestingly, even the client overlap is minimal.
Given that in scale terms, the combined entity continues to remain between
INFO and TCS, it does not suggest serious threat to the existing order of India-
based IT service providers. CAP’s offshoring presence gets enhanced as a result,
but at a stage when offshore cost arbitrage as the sole value proposition has
increasingly come into question.
Bucks the buzz around shopping for innovative start-ups
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); +91 22 3982 5424
Siddharth Vora
(Siddharth.Vora@MotilalOswal.com); +91 22 3982 5585
Investors are advised to refer through disclosures made at the end of the Research Report.
27 April 2015
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Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

Technology | Update
Even though newer services will add bulk of incremental revenues in the years
to come, synergies are still to be had in merging of two traditional providers
(cost efficiencies/services cross-sell). Simply put, greater the commoditization,
lesser the number of vendors there will be room for. So while companies will be
in the hunt to buy capabilities around new areas, there may continue to be
sporadic instances of such combining of two traditional service providers.
Pertinently, companies that fall behind the curve on Digital technologies may be
the ones that get bought out — whose larger accounts can be offered a broader
gamut of services.
Strategic rationale: Cost and cross-sell synergies, greater North American
presence
One of the wish list of Capgemini was to expand presence in North America.
With IGATE, North America becomes its largest market, with an estimated
combined revenue of 30% of the group in 2015.
And IGATE will also significantly scale up CAP’s global delivery network, making
the combined Indian platform at par with the best industry leaders.
There are some quantified synergies over three years – [1] EUR30-40m in SGA
savings, [2] EUR45-65m in savings coming from the improvement of the
combined operating model in North America and India and [3] USD100-150m
revenue growth synergies from cross selling opportunities.
The accretion of normalized EPS will be at least 12% and 16% in 2016 and 2017
post equity issue.
There is only one prominent common account – CNA, with whom IGATE had
signed their largest ever deal in September 2014.
It also increases CAP’s offshore leverage to 55% by end of 2015. Its new
midterm target is 65%.
Interesting comments by the senior managements
CAP:
“We chose not to acquire one of these fancy jewelry in the digital world
that would be very expensive than this one but also extremely volatile. And the
retention of talent when a large company like Capgemini acquires one of these
startups, the retention is very difficult.”
IGATE:
“The market has changed quite a bit in terms of the expectations from
service providers. And to be able to play outside of the traditional areas that
service providers have played in, you need to– you need to be a much larger
digital analytics / SMAC stack player.”
Exhibit 1: Combined entity snapshot
(EUR m)
Revenue
YoY (%)
EBITDA
EBITDA %
Employees ('000)
CAP
10,573
5
1,154
11
144
IGATE
1,196
10
276
23
Combined
11,769
5
1,430
12
33
177
Source: Company, MOSL
27 April 2015
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Technology | Update
Exhibit 2: North America will now be CAP's largest geography
Geo-wise revenue (%)
North America
UK
France
Rest of Europe
APAC & LATAM
CAP
21
21
22
28
8
IGATE
Combined
78
27
6
19
1
20
8
26
6
8
Source: Company, MOSL
Exhibit 3: Adds scale to Financial Services
Vertical mix (%)
Public Sector
Financial Services
Mfg, Autos, Life Sciences
CPG | Retail | Distribution | Transportation
E&U | Chemicals
Telecom | Media | Entertainment
Others
CAP
22
22
17
14
12
8
5
IGATE
Combined
-
20
42
24
36
19
9
13
-
11
-
7
13
6
Source: Company, MOSL
Exhibit 4: Offshore scale is one of the key potential benefits, improving competitiveness
Geo-wise headcount (%)
Europe
North America
APAC & LATAM
CAP
44
7
49
IGATE
Combined
2
36
16
9
83
55
Source: Company, MOSL
Exhibit 5: Comparative Valuation
Mkt cap Rating
(USD b)
TCS
76.9 Neutral
Infosys
35.7
Buy
Wipro
20.6 Neutral
HCL Tech
19.6
Buy
TechM
8.7
Buy
Cognizant
36.5 Not Rated
Tier-I Agg
198.0
Mphasis
1.2 Neutral
Mindtree
1.6 Neutral
KPIT Tech
0.6 Neutral
Hexaware
1.0
Sell
NIIT Tech
0.3 Neutral
Persistent Sys.
1.0 Neutral
Tier-II Agg
5.7
Company
EPS (INR)
FY15E FY16E
110.8
121.6
107.9
112.2
35.1
36.6
50.4
55.8
32.1
38.7
2.3
2.7
30.1
63.9
13.2
10.6
22.0
36.3
33.9
74.6
15.2
15.1
34.9
39.8
FY17E
143.5
131.9
41.6
63.9
47.8
3.2
36.7
91.8
19.5
18.6
42.2
49.7
FY15E
22.6
18.4
15.2
17.5
18.3
25.4
19.6
12.8
18.7
11.0
29.0
16.6
19.1
17.9
P/E (x)
FY16E
20.6
17.7
14.6
15.8
15.2
22.3
17.7
11.4
16.0
9.5
20.4
10.5
17.4
14.2
FY17E
17.4
15.1
12.8
13.8
12.3
18.7
15.0
10.5
13.0
7.4
16.6
8.7
14.0
11.7
FY15E
38.5
26.0
23.0
32.2
26.7
20.7
27.9
12.2
29.4
20.3
25.7
9.9
22.1
19.9
RoE (%)
FY16E
37.0
23.5
20.7
29.4
25.5
19.2
25.9
13.0
28.2
20.6
34.7
14.5
21.1
22.0
FY15-17E CAGR (%)
FY17E
USD rev. EPS
35.5
12.8 13.8
24.3
10.3 10.6
20.7
8.0 8.8
27.7
12.7 12.6
25.8
19.5 21.9
18.9
16.8 16.5
25.5
13.4
4.6 10.4
28.5
15.4 19.9
21.4
12.2 21.8
40.2
18.2 32.1
18.0
10.2 38.4
22.7
16.5 16.9
24.1
Source: Company, MOSL
27 April 2015
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