Will Capgemini’s gain be Indian IT’s loss?2 min read . Updated: 28 Apr 2015, 01:28 AM IST
If things play out as Capgemini's investors expect, India's IT services industry could be worse-off in the medium-to-long-term
Investors tend to frown at large acquisitions because of the low success rate of such transactions. Cap Gemini SA, however, has got a big thumbs up from investors for its $4.04 billion acquisition of iGate Corp; its market capitalization rose by around $1.05 billion after the deal was announced.
If things indeed play out as Capgemini’s investors expect, India’s IT services industry could be worse-off in the medium-to-long-term. The Europe-based company’s offshore capabilities will get a big boost, as the acquisition will result in over 100,000 employees in global delivery centres. With such a large offshore presence, it will be able to compete far more effectively on price with Indian IT vendors.
Recently, while discussing its quarterly results with analysts, Wipro Ltd’s chief executive officer T.K. Kurien said global vendors are coming back aggressively to maintain their share in the infrastructure services business. In the past, global vendors such as Accenture Plc and Capgemini were at a disadvantage in terms of costs. Now, with a much larger offshore presence, they can compete far more effectively on prices. Of course, as far as the increased threat from Capgemini goes, this will take some time, as the integration process is expected to take a while.
Another benefit for Capgemini is iGate’s large US presence, which will be a good fit, given Capgemini’s nascent presence in the region. It got less than 24% of its revenues from North America last quarter, up from less than 20% a year ago. While the combined entity’s revenues in the region amount to 30% of the total, there is potential for outsized growth in the region on the back of cross-selling of services.
Of course, in the end analysis, it will all boil down to how well Capgemini manages the integration. Partha Iyengar, head of research (India) at technology researcher Gartner, says the biggest hurdle ahead for Capgemini is the multi-cultural integration that lies ahead. The company’s track record with Kanbay was not the biggest success, he says. Earlier, at the peak of the dotcom boom in 2000, it had paid $11 billion in cash and stock to buy the consulting unit of Ernst and Young, which had turned out to be a disaster. The good thing is that the iGate transaction looks far more pragmatic, and Capgemini is expected to apply the lessons learnt from past mistakes. For now, investors are giving it the benefit of doubt.
The writer doesn’t own shares in the above-mentioned companies.