Capgemini’s IGate buy expensive, but justified due to company's strong hold in North America: Experts

ET INTELLIGENCE GROUP: Has Capgemini paid a lot to secure a place in the US, the largest IT outsourcing market, by acquiring IGate?

Capgemini has offered to buy IGate Corp for $4 billion funded by internal cash, debt and equity.

This is 3.2 times IGate’s annual revenue of $1.2 billion in 2014.

Some of the deals over the last four years, where small and midsized Indian IT companies were bought, the ratio was around 1.6 times. In addition, the deal value is over 15.3 times IGate’s earnings before interest, tax, depreciation and amortisation (EBITDA) of $263.9 million in 2014.

It is marginally higher than the Bloomberg median of 14.6 for similar deals. This may make the IGate acquisition sound expensive.

For instance, Patni Computer Services was valued at over Rs 5,560 crore or 1.6 times its annual revenue when IGate acquired it in January 2011. In another deal, Baring Partner valued Hexaware at Rs 3,000 crore or 1.5 times sales during the August 2013 acquisition of the latter.

Analysts think that the premium is justified given the IGate’s strong foothold in the North American market, which has been the biggest outsourcing market for IT vendors. Cap Gemini predominantly serves Europe with over 70% revenue coming from the region. After the acquisition, the Europe share will reduce to a half.

“Capgemini’s EPS (earnings per share) is expected to improve by 12% in CY16 and by 16% in CY17 due to the acquisition. Given IGate’s scale and efficiencies, the premium seems to be justified,” said Reliance Securities’ IT analyst Apurva Prasad.

IGate’s revenue increased at a three-year compounded annual growth rate (CAGR) of 18% in 2014. Net profit available for common equity holders rose at a CAGR of 28.4%.

A look at some of the deals struck a decade ago reveal that valuations were aggressive where the buyers identified operational synergies.

Oracle valued iFlex at 3.5 times sales during the 2005 acquisition worth Rs 3,960 crore ($909 million) at the time. In another deal during 2006, EDS valued Mphasis BFL at 3.5 times sales.

iGate ended the day 3.29 per cent higher on Nasdaq.