Tata Consultancy Services Ltd’s (TCS’s) shares have gained by 1.3% after the company announced the acquisition of France’s Alti SA for €75 million (around Rs.532.5 crore today). It doesn’t seem like much of a reaction, but for a company with a market capitalization of €41.4 billion, it means an increase of around €530 million in market value.
Clearly, to say the acquisition of the technology services firm has struck a chord with investors will be an understatement. There are a number of reasons why the deal looks good.
First, it will help the company increase exposure to the French market when customers there are getting increasingly open to offshoring of IT services. In the year till March 2012, TCS’s French unit reported revenues of €48 million. Alti’s 2012 revenues of €126 million will result in a near fourfold increase in the company’s presence in France.
The acquisition appears cheap at 0.6 times past revenues. But it must be noted that Alti’s margins are likely to be in single digits and, hence, the price-to-earnings ratio will not look cheap.
In this backdrop, it’s fair to ask how the acquisition makes sense for TCS. The reported stagnation in Alti’s revenue seems to reflect the state of the French economy.
However, TCS can offer its wide range of services to Alti’s clients and expect growth rates to pick up. Improving margins, however, will be a bigger challenge, given the stringent labour laws in Europe.
In sum, the Alti deal is a positive for TCS. But the fact that TCS’s market cap has already increased by multiples of the acquisition value means investors have priced in all the positives and more.