Capgemini leads race for Headstrong buyout, deal pegged at $500 mn

Paris-headquartered Capgemini, one of the world’s largest IT services companies, is in advanced talks to buy a controlling stake in mid-sized IT services provider Headstrong from the founders of the company and private equity investor Welsh, Carson, Anderson & Stowe, at least two people familiar with the development said on condition of anonymity.

Headstrong, a privately-held company, was formed after former HCL co-founder Arjun Malhotra led a merger of his company Techspan with James Martin Associates in 2000 to create a new re-branded entity. James Martin is Chairman Emeritus of Headstrong while Malhotra is the chairman of the company.

Welsh, Carson, Anderson & Stowe which invested around $160 million in Headstrong in 2000 is looking to sell its entire stake in the company. WCAS owns majority stake in Headstrong.

An executive advising Headstrong on the sale said that the first round of bids for the company were submitted last week and that IBM and Hewlett Packard-EDS have also submitted preliminary bids for a controlling stake. “Capgemini’s bid values Headstrong at close to $500 million and could make it a clear front-runner in the competitive bidding process”, the executive said. Morgan Stanley has been appointed to run the auction process for the sale of Headstrong.

Arjun Malhotra, declined comment for this story. Spokespersons for Capgemini and IBM declined comment. Headstrong provides IT services solutions to clients in the financial services sector and reported revenues of $170 million for the year 2009, according to the company’s website.

Morgan Stanley is Headstrong’s largest client and may provide an assurance to the successful bidder for continued business from them, according to a senior executive representing one of the bidders.

“The auction process is still at a preliminary stage and could attract interest from other bidders in the weeks ahead”, the executive quoted earlier said, adding that Capgemini has bid more aggressively because it is keen on developing its capital markets and securities trading verticals where Headstrong has a competitive advantage.

Headstrong has 3,000 employees and offices in eight countries. It also has three offshore centres in Noida, Bangalore and Manila from where it provides outsourcing services to its clients.

New York-headquartered Welsh Carson manages a portfolio of investments valued at close to $20 billion and specialises in investing in information/business services and healthcare.