Mumbai: At $4 billion in cash, it may seem that Cap Gemini SA, the Paris-based information technology (IT) services firm’s decision has paid a huge amount, perhaps much more than required, to acquire Nasdaq-listed iGate Corp. that closed 2014 with $1.3 billion revenue, especially at a time when the entire IT industry’s growth has slowed down.

Software lobby Nasscom projects 12-14% revenue growth for Indian IT firms in 2015-16, as opposed to 13-15% revenue growth a year back.

So why would the Capgemini group go ahead with such a decision?

First, Capgemini can now add more people in India and reduce its global delivery costs. The group does over 47% of its worldwide delivery from offshore centres, of which India accounts for a little over 70% of the total pie.

Capgemini is also the only European firm to employ more than 50,000 people in India, making the country its largest offshoring centre. The target was to have 70,000 employees by 2016-end, and with iGate’s acquistion, the company should have about 80,000-85,000 employees in the country by end-2015 and a little over 100,000 by end-2016 if it meets its internal hiring target.

In comparison, Capgemini’s rival Accenture Plc has more than 80,000 employees in the country, or about one-fifth of its global workforce here, and International Business Machines Corp. (IBM) employs about a quarter of its 434,000 employees in India.

Second, iGate, similar to most IT services providers, gets most of its business from the US. On the other hand, Capgemini gets most of its business from the UK. So the latter gets a bigger US market since iGate gets about 79% of its revenue from the US and 14% from Europe.

Third, Capgemini can become strong in the infrastructure business after it completes the iGate acquisition. This is an area that Capgemini is not particularly known for. The infrastructure piece will come particularly handy since Capgemini’s competitors like IBM, Wipro Ltd and HCL Technologies Ltd have a robust systems integration and infrastructure business.

Fourth, Capgemini can also strengthen its India (domestic) business with the iGate acquisition, an area which the company has been attempting to do in the last couple of years.

IGate, itself, grew through the acquistion of Patni Computer Systems Ltd.

On 11 January 2011, iGate announced the acquisition of a majority stake in the Mumbai-based IT services company Patni for around $1.22 billion. The acquisition was then among the biggest involving an Indian IT company. In 2006, EDS Corp. acquired MphasiS BFL Ltd for 1,748 crore. And in 2005, Oracle Corp. had acquired i-flex Solutions Ltd for 4,090 crore.

IGate and private equity (PE) firm Apax Partners had then signed definitive agreements with the three founders of Patni—Narendra Patni, Gajendra Patni and Ashok Patni—to acquire their 45.6% stake, and with PE firm General Atlantic Llc for its 17.4% stake.

While Gajendra and Ashok Patni were in favour of the move, Narendra Patni was a reluctant seller of Patni Computer Systems, a company where N.R. Narayana Murthy and most other co-founders of Infosys Ltd once worked.

The Patni brothers, thereafter, decided to turn investors from being entrepreneurs.

It was Phaneesh Murthy, who had to quit Infosys as global head of sales on sexual harassment allegations, who is widely credited for turning around the fortunes of the struggling software services firm and for growing it into a $1 billion company, which was buoyed by the company’s acquisition of Patni. Murthy himself was asked to quit by the iGate board on 21 May 2013 for failing to disclose a relationship with a subordinate employee. But he filed a multi-million dollar lawsuit against iGate, alleging defamation and wrongful termination of employment. The case has been settled, according to a 7 February report in the Hindustan Times.

iGate struggled to fill the chief executive’s chair for several months, with several potential candidates declining to take up the assignment, citing concerns over the company’s huge debt, pending lawsuits and unresolved tax disputes.

However, in September 2013, iGate finally named Ashok Vemuri as its new chief executive, after the latter decided to leave Infosys. Vemuri had spent 15 years with Infosys and was seen as a potential candidate to replace current chief executive S.D. Shibulal after his retirement in early 2015.

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