The Internet is abuzz with news of a potential takeover of CapGemini by Indian IT giant Wipro. (MoneyControl) Although CapGemini has made the claim that there has been no contact with the potential suitor. However, The Hindustan Times has reported Wipro’s Chief Strategic Officer Sudip Nandy as saying: “Of course, we are interested in larger deals and aggressively looking for inorganic growth options” adding fuel to the fire.
This comes hot on the heels of another takeover rumour by Infosys earlier in 2007. But why so much talk in the market? CapGemini is still a giant of management consulting, with annual sales equal to several times that of it´s rumoured suitors. reporters out of India put the blame, conveniently, on the fact that CapGemini has been slow to adopt the trend of outsourcing large parts of their workforce to India and other cheap labor countries. But there must be more to it than that.
Since the acquisition of the outsourcing firm Kanbay in February the company has made no bones abouts its plans to increase its prescence in the outsourced sector, with reported statements putting their goals at 40,000 Indian employees within the next three years. Approximately 40% of its global workforce.
But, this is still a company that posts annual revenues of around $12 billion USD. Even with margins less than those of Wipro, it is still a sizable creature. And Wipro does not have a lot of ready cash on its books right now. recent acquisitions in its own past have left it a little stretched also. The Hindustan Times goes on to state that Wipro is frantically meeting with Bankers and other financial sector players trying to raise the capital required. (Rumoured to value CapGemini at around $7bn)
So if this financially seems a little bit off, then why in the world is it even being considered? We think the reasons for any takeover talk are more to do with global economics than any fault with the management of the growth strategy of CapGemini itself.
1) The US economy appears to be stressed and waning. At present Europe is a far better acquisition ground than the US. Europe has several strong economies right now, not excluding that of France here CapGemini is based.
2) CapGemini appears cheap! Recent closes at $45 place it a long way behind the March close of $59. If this is a true reflection of what the market actually values the stock at then Wipro would be getting it at a considerable discount.
3) Indian companies are ambitious. Tata Consulting, Mittal steel, Reliant Energy, all recognized as giants within the business world, and all emerging out of India. The nation is expanding, rapidly, and it is collectively pushing to carve out financial bases all over the globe, rather than being confined to the subcontinent.
CapGemini would give them access to a range o finternational markets that they do not currently have, lower profit levels that could be stripped out via their existing outsourcing capabilities, and access to a range of additional sectors outside of technology and IT if they wanted it.
The CapGemini acquisition, if there ends up being any substance to the story, would not be the first time a smaller company has bought out a larger one. But recent market movements, such as the BHP / RIO TINTO showpiece, have shown that acquisition targets may not always want to go quietly into the night.
