Paris-based information technology (IT) services firm Cap Gemini SA said on Monday that it was acquiring Nasdaq-listed iGate Corp. in a cash deal for $4 billion in a transaction that will create an entity with combined revenue of $12.5 billion and 190,000 employees as the two companies seek to better compete with larger rivals.
Capgemini will offer $48 for every iGate share as part of the definitive merger agreement, which marks a 5% increase over the iGate stock’s Friday closing price of $45.85 on the Nasdaq stock exchange. The acquisition of New Jersey-based iGate will strengthen Capgemini’s businesses in application and infrastructure services as well as business process outsourcing (BPO) and engineering services space.
North America will represent 30% of the estimated combined revenue. Capgemini expects the new organization to be in place within three months of closing the deal. The integration is expected to be completed within nine months.
“IGate is a leading company that perfectly fits our strategic ambition. It will give us a new status on the American market, and take further our industrialization journey to offer ever more competitive services to our clients,” Paul Hermelin, chairman and chief executive officer of Cap Gemini, said in a statement.
“This will also give to the Group’s Indian operations a new scale, allowing us to compete on par with the best US-based and Indian-based companies. ”The combination of iGate and Cap Gemini provides cross-selling revenue synergies of $100-150 million; annual efficiency gains estimated at $75-105 million are expected to be achieved within three years, the statement said.
iGate is headed by former Infosys executive Ashok Vemuri. iGate acquired Mumbai-based Patni Computer Systems Ltd in 2011 for around $1.22 billion. “In Capgemini, we have found a partner that will advance our ability to innovate and build industry solutions that will enhance the value proposition we bring to our clients. In addition, this powerful combination will provide exciting opportunities for our employees to expand their capabilities,” Vemuri said.
The acquisition is a sweet deal for investors but on the expensive side, Sanchit Vir Gogia, chief analyst and group CEO of Greyhound Research, said. He pointed out that iGate has been on the block for the past four years.
“iGate’s main strengths have been in healthcare, FSI (financial services and insurance) and manufacturing sector. The healthcare sector in the West presents a lot of opportunities, especially in the UK. Also, with NHS (national health service) in UK going the privatization way soon, we believe this surely puts Capgemini in a very well placed and profitable spot,” said Gogia.
“This is a game of size and scale relating to offshore transaction capabilities,” Sudin Apte, chief executive officer and research director at Offshore Insights Research and Solutions Pvt. Ltd, said. “The acquisition will scale up its offshore capabilities (of Capgemini) making it more competitive in the market,” Apte said.
Apte expects the transaction to possibly yield some deal flows from Europe which will open up an opportunity for the company to tap the continent with improved offshore services, improving margins. In the India context, Apte said, the deal will intensify competition not only with big Indian IT firms, but also with the likes of International Business Machines Corp. (IBM). It is also likely to put pressure on medium-size IT firms.