Capgemini’s $4 billion offer to acquire IGATE–the largest buyout of an India-related IT services firm–could well be a harbinger of a clutch of merger and acquisition (M&A) deals involving mid-size firms, say industry watchers.
“We expect more mid-sized IT companies to be acquisition targets for global MNCs given access to cheap capital and the need to quickly scale offshore presence,” said Sagar Rastogi, senior analyst, Ambit Capital.
“There are lots of such players which are attractive for big global companies. There won’t be many acquisitions but there can be a few,” said Sanchit Vir Gogia, chief analyst and group CEO of Greyhound Research.
According to sources, talks have been going on within industry circles for both new generation firms as well as bunch of mid-size companies, including a few which are public listed.
Two years ago Baring Private Equity Asia had acquired majority stake in Hexaware.
Last year, rumours of a potential sale of top-tier firm HCL Technologies were making the rounds. However, the reports were dismissed by the promoters who have since then sold a small chunk to fund their philanthropic activities.
“Some of the smaller companies which are not doing well and are facing hard questions from investors may find sell-out an easier option in an increasingly tough market,” said Gogia, though he refused to name companies.
Another repercussion of the Capgemini-IGATE deal is that the French MNC will become a formidable competitor for major Indian IT companies in the US, their key market, which may trigger price wars and margin pressures.
The US market accounts for roughly 60 per cent of revenue for Indian IT vendors.
The US accounts for 21 per cent of Capgemini’s revenue while IGATE is a US-centric firm with 79 per cent of its business coming from North America. The combined entity will have 27 per cent of its revenue from the US and 30 per cent from North America, making it the key geography for Capgemini.
“Capgemini typically competes with other global MNCs such as IBM, Accenture and Cognizant. But this acquisition allows it to lower prices and fight for smaller accounts,” Gogia said.
“Indian players such as TCS, Infosys, HCL and Wipro are in for a tough competition. You can expect price wars and shifting of global accounts,” he said.
The combined entity is expected to be a lot stronger on banking and finance, healthcare and life sciences verticals.
With the proposed acquisition, Capgemini will also expand the workforce in global delivery centres, primarily in India, directly translating to an increase in offshore leverage to 55 per cent.
The company has now set a mid-term target of taking offshore leverage to 65 per cent, Paul Hermelin, chairman and CEO of Capgemini said in a conference call after the announcement of the deal.
The combined entity of Capgemini and IGATE in India will be among big boys of IT service industry in the country, at least in terms of staff strength.
“As of now we have 85,000 people and will exceed 90,000 by the end of this year. We will reach probably 100,000 in India by next year,” Hermelin told reporters.
With around 55,000 employees in India, Capgemini is already the seventh largest IT employer in India. It will remain the seventh- largest IT employer in India but will close the gap with bigger players such as Tech Mahindra (98,000) and HCL (100,000).
It will remain much smaller compared to the big four: TCS, Cognizant, Infosys and Wipro.
(Edited by Joby Puthuparampil Johnson)
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