What The Capgemini-iGate Deal Means: Analysts' View

by CXOtoday News Desk    Apr 27, 2015

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French IT services provider, Capgemini’s acquisition of iGate for $4 billion is much more than just getting a stronger presence in India. Experts believe the acquisition validates how European IT services players are getting aggressive in making a mark in the global IT services market, including India. The deal is also an important one for iGate, which has seen a decline in the margins and their costs had gone up considerably - which at the same time striving to succeed in the ‘digital’ space. Here’s what two leading market analysts have to say.

Phil Fersht, CEO of US-based HfS Research

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Most of the leading  today are looking at niche buys that specifically add software IP or a vertical capability, such as Cognizant-Trizetto, or Infosys-Panaya. However, in Capgemini’s case, there are still some significant holes in its portfolio to fill out, most notably a more powerful presence in India, a stronger portfolio of US enterprise clients, and a deeper foothold in financial services. iGate brings these to the table. 

As Capgemini gets only 20% of its revenues from the US, the world’s biggest outsourcing market, the acquisition of iGate, which gets 70% of its revenues from the US, could significantly deepen Capgemini’s access to US clients. 

Capgemini has worked hard over the last few years to build its presence in India starting from the acquisition of Kanbay back in 2006. Today it has 55,000+ FTEs in India as compared to 30,000+ at iGate, whose delivery footprint may be especially interesting to Capgemini who have been trying to grow their presence in Tier-II cities in order to reduce labour costs and iGate may be an accelerant to this effort.

Net-net, we applaud the boldness of this move, and hope, for Capgemini’s sake, the French mothership can integrate the two firms effectively. However, we also hope Capgemini can quickly focus on some specific niches that have real As-a-Service elements so them, such as strong analytics depth in discrete functions, and further industry vertical strengthening. 

In addition, we are still awaiting the firm to pack its punch in automation and cognitive, where it is beginning to talk a big game, but needs to demonstrate some real investment plans.

 

Sanchit Vir Gogia, Chief Analyst & Group CEO, Greyhound Research

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While this should ideally help catapult Capgemini’s business in the United States but output will much depend on how Capgemini plans to integrate both the business and approach clients for conversations. Capgemini has been investing in India for the last few years -both as a delivery centre and as a market -as it looks to compete on a more even playing field with Indian IT providers.  It took a little time in adopting India as its global hub for offshoring but is now going full throttle.

Capgemini’s dependence on India for manpower is higher when compared with its two main multinational rivals. Accenture has about 60,000 employees in the country, or about a fifth of its global workforce, while IBM employs a quarter of its 434,000 employees in India. But, it’s not only about the headcount. Offshoring makes up 44 per cent of Capgemini’s total global revenue. India handles 80 per cent of the offshore work. The remaining 20 per cent is shared by Morocco, Poland, China, Argentina and Guatemala. India has helped Capgemini become a more global player. India handles most of Capgemini’s clients in some form or the other.

Capgemini have to increasingly focus on operational services and a range of corporate support functions, ensuring the key growths of each BU and various markets. Capgemini is also betting big on Digital services, the company will have to work towards ensuring these services contribute increasingly to the company’s overall revenue.”

iGATE has seen a decline in the margins and their costs had gone up considerably. The revenue increase has been a nominal 10 percent. The company has been on the blocks and has been up for grabs for the past 4 years. However, its main strengths have been in Healthcare, FSI and Manufacturing sector. The Healthcare sector in the west presents a lot of opportunities, especially in UK. Also, with NHS in UK going the privatization way soon, we believe this surely puts Capgemini in a very well placed and profitable spot.

Since iGate has been a strong player in the mid-tier segment, it allows them a cost advantage much more than some of its larger peers. The company has been aggressively focussing on Mobility and Digital, we believe this also works in favour of Capgemini as both the organisations have their own strengths in Digital.