Infosys to acquire Capgemini ?

Indian tech behemoth Infosys Technologies now moves the international bourses. A spate of rumours on the trading floors of Europe that Infosys is mulling a bid to buy Europe’s largest IT services giant, Capgemini, lifted the mood on Euronext, Paris, and pushed Paris’ CAC-40 index up by 3.58 euros. This at a time when the buzz surrounding Infy looking at a big inorganic move — read a marquee acquisition — gathered pace.

Both sides strongly denied any such move. European market reports across agencies quoted traders, as rumours that Infosys is mulling a bid for the consultancy emerged. At 10:00 pm IST, on France’s CAC-40 benchmark index, Capgemini gained 4.6% to a two week high of 53.78 euros. “There is no possibility of it acquiring Capgemini, and nor were there any preliminary discussions," persons closely involved with Infosys said. An official spokesperson for Capgemini, Europe told ET: “We do not comment on speculation.”

Whether it does or not, the story isn’t so much about Infy acquiring Capgemini.

It’s about the fact that European investors were happily mopping up Capgemini shares, and pushing up its relatively languishing scrip in the belief that Infy can, and will. Infosys is “big enough and none of the large Indian players has made a large acquisition in Europe,” reported AFX, citing a Dresdner Kleinwort analyst.

Now, an Indian contender is fast becoming de rigueur in any deal story overseas. It’s yet another sign of India Inc’s rising clout in the global M&A market. On any given day, European markets swirl with rumours of bid talks for at least a dozen companies.
Now, suddenly, traders on equity floors are throwing in — almost as a routine — the names of Indian companies into the melee, and share prices of target or acquirer companies are dancing to the India tune.

Market reports also quoted analysts assaying, "margins are very high in consulting business as compared to other commoditised business Infosys has. If the deal with Capgemini actually happens, Infosys will be able to successfully compete with other biggies in the consulting space... it will fit in very well."

If such a merger were to happen, the combined strength of the two companies in terms of turnover would stand at around $14 billion, still some way behind global leaders IBM, EDS and Accenture. The consulting business for Infosys is still on the investment mode, at 1.3% of total revenue, and suffered a loss of Rs 111 crore with a topline of Rs 213 crore in FY07.

However, the financial fundamentals of both the IT services giants throw up a very diverse set of numbers. The operating margin of Infosys stands at 27.57% while for Cap Gemini it is at 5.8%. For FY07, Infosys registered revenues of $3.09 billion, while it was $10.3 billion for Capgemini in calendar 2006. Even the outlook for the ongoing fiscal shows diverse projections. Infosys said it is looking at achieving a topline growth of 28-30% (in dollar terms) for FY08, while Capgemini has projected an 8% growth in 2007.

Though Infosys has publicly stated it would be looking at acquisitions if it brings certain niche capabilities or newer markets, sectoral analysts believe that in the case of Capgemini, it seems highly improbable.

Capgemini has itself been in acquisition mode. Last year it acquired Kanbay for $1.25 billion and has barely completed the integration of that merger.

Capgemini, however, is a scrip that seems to attract bid speculation. Just last week, there was speculation that it would make a bid for rival Atos. In 2000, it had acquired the consultancy arm of E&Y and had reportedly faced integration issues. At that time, media reported the company as saying it was in “no mood for further restructuring, having just finished one merger."

But according to a professor at Wharton Business School who has advised frontline Indian software firms, their consulting businesses have not quite achieved traction so far. This may have prompted software majors to reassess their approach to the consulting business. A stronger consulting business is likely to chivvy up valuations, he added.

On the other side, for Capgemini, a company that has just returned to the black, this may be the time to capitalise on its consulting business value, which accounts for 11% of its total revenue. Observers say, in the face of sedate growth projections in the medium term, the company may not be averse to hiving off its consulting business. However, they do not rule out the possibility of the company being open to a total sell-out as well.

For Infosys, which has never scripted a significant inorganic growth story, an acquisition of this size would seem a tad far fetched. Officials at Infosys have earlier said that any acquisition of a large company will have look into multiple and complex issues, especially the cultural fit between the organisations.

But, as the Wharton professor said: “In the event of a full-scale merger, Infosys faces its biggest challenge in managing the issue of cultural integration. After all, people are at the heart of any IT acquisition and any loss of key personnel can completely upset the calculations.”

Back home, the Infosys scrip ended at Rs 1925.05 on the National Stock Exchange, lower by 0.53%. On the Nasdaq, at the time of going to press, it was quoting at $51.15, up 0.61%.