French IT services giant Cap Gemini SA, which operates under the Capgemini brand, has inked a deal to acquire New Jersey-headquartered IGATE Corp for $4 billion, it said on Monday. Co-founded by Ashok Trivedi and Sunil Wadhwani, NASDAQ-listed IGATE, which acquired Patni Computer Systems Ltd four years ago, has a large chunk of its global operations based in India.
It is the single-largest deal in the IT sector involving an India-related business.
The deal, which is subject to necessary approvals, is expected to close in the second half of 2015 and would give an exit to IGATE’s private equity backer Apax Partners.
Apax had backed the firm for its acquisition of Patni and holds 28.91 per cent stake in the firm. It would get $1.15 billion in this exit.
The PE firm had committed to invest up to $480 million, but ended up putting in $330 million in two tranches in 2011. It later bought some more shares through the secondary market for $20 million.
Last year, IGATE had disclosed that it paid Apax $80 million in cash for early conversion of its preference shares into equity.
This gives Apax an estimated 3.7x in gross returns after factoring in around $90 million in cumulative dividends on its preferred stock, as per VCCircle estimates.
This would give it close to $1 billion in absolute net gain on original investment over a four-year period making it one of the biggest such exits from an India-related portfolio firm. Warburg Pincus had churned out absolute net gain of around $1.5 billion over a decade ago from its investment in Bharti Airtel.
An email query to Shashank Singh, partner and head of Apax Partners India, did not immediately elicit a response.
Singh is one of the two Apax representatives on IGATE board. The other Apax nominee is Salim Nathoo, a partner and co-head of the global telecom and technology team at Apax Partners LLP, London. Besides these two, Apax’s investment in IGATE is also managed by Rohan Haldea and Gautam Narayan, who are part of Apax’s team in London and Mumbai, respectively.
What the deal is and what it means to Capgemini
Capgemini and IGATE’s board have entered into an agreement in which IGATE’s shareholders will get $48 per share. The deal will be financed through a combination of cash, equity portion translating into a dilution not to exceed 6 per cent of Capgemini share capital and debt.
The deal would lead to a one-step cash merger between IGATE and a subsidiary of Capgemini North America Inc. The merger has been approved by a written consent of IGATE shareholders representing approximately 54 per cent of the capital (subject to a 30-day fiduciary out period during which IGATE could accept a superior proposal).
The transaction is expected to be immediately accretive to Capgemini’s operating margin and earnings per share. With this, IGATE strengthens Capgemini’s key businesses in application and infrastructure services as well as BPO and engineering services and adds clients like General Electric and Royal Bank of Canada in its portfolio.
“IGATE is a company that perfectly fits our strategic ambition. It will give us a new status on the American market, and take further our industrialisation journey to offer ever more competitive services to our clients. This will also lend the Group’s Indian operations a new scale, allowing us to compete on par with the best US-based and Indian-based companies,” said Paul Hermelin, chairman and CEO of Capgemini.
IGATE generated $1.26 billion in revenue in 2014, a rise of 10.2 per cent over 2013. It had 19 per cent operating margin, much higher than that of Capgemini.
Bulk of its revenue comes from North America (79 per cent) followed by Europe (14 per cent) and the rest from Asia-Pacific. This would especially boost Capgemini’s presence in North America.
Capgemini would now have an estimated $4 billion revenue in North America, making it the top market with approximately 30 per cent of the pro-forma combined revenues in 2015. An estimated 50,000 employees will be servicing Capgemini’s North American clients.
This transaction would push Capgemini’s combined revenue to €12.5 billion in 2015 with double digit operating margin and around 190,000 employees. IGATE currently employs over 33,000 people.
IGATE draws 42 per cent of its revenues from the financial services sector and would also reinforce Capgemini’s position in the retail, manufacturing and healthcare sectors and help in a faster transition to platform-based solutions.
In addition to its experience in applications services, IGATE has complementary capabilities in infrastructure services, vertical BPO and engineering services. Moreover, its intellectual property offerings such as IDMS in analytics present a high growth and margin potential, Capgemini said.
It said the combination of IGATE and Capgemini provides cross selling revenue synergies of $100-150 million and annual efficiency gains estimated at $75-105 million to be achieved within three years.
The new organisation will be in place within three months of closing and the integration is expected to be completed within nine months.
Co-founded by Ashok Trivedi and Sunil Wadhwani in 1996, IGATE went public on NASDAQ the same year. It acquired majority stake in Patni Computer Systems in 2011 and completed the acquisition and delisted the firm a year later. It had brought in Apax Partners as a key shareholder to back this transaction.
The firm crossed the $1 billion revenue mark in 2012.
In September 2013, it appointed Ashok Vemuri, former Infosys’ board member who was also head of Americas besides chief of the manufacturing and engineering vertical, as president and chief executive officer. This was four months after the company sacked its previous CEO Phaneesh Murthy over failure to disclose his personal relationship with a subordinate.
Vemuri had quit Infosys in a significant move as he was one of the top contenders to take over as chief executive. He could have been the first chief of the company who was not also a co-founder of Infosys. The role was given to Vishal Sikka last year.
The same year IGATE achieved market capitalisation of $2 billion. Last year it completed reorganisation of the company into vertical-based business units.
The co-founders of IGATE will get around $500 million each from the deal.
(Edited by Joby Puthuparampil Johnson)