[PARIS] Cap Gemini SA, the largest European technology services provider, agreed to buy Igate Corp for about US$4 billion in cash to expand in North America, which is outpacing Europe's growth.
Igate investors will receive US$48 a share in the transaction, which has been agreed to by most of its shareholders, the companies said in a statement Monday. That's 4.7 per cent more than last week's closing price and values Igate at about 17 times earnings before interest, taxes, depreciation and amortization, compared with a median of 14.6 times for similar deals according to data compiled by Bloomberg.
"It's a geographic fit," Cap Gemini chief executive officer Paul Hermelin said in a conference call. After the deal, Europe will account for no more than half of Cap Gemini's total sales, he said, compared to more than 70 per cent last quarter including the UK and Ireland.
The deal marks a new chapter in the history of Cap Gemini, a competitor to International Business Machines Corp, and one of the five biggest computer services providers in the world in the late 1980s. Cap Gemini struggled in the aftermath of the Internet bubble, turning to extensive restructuring as its credit rating got cut to junk and its stock fell near an all- time low about a decade ago.
With the transaction, the French company gains access to customers including General Electric Co. and Royal Bank of Canada. Together Cap Gemini and Igate would have combined annual revenue of 12.5 billion euros (S$18.1 billion) and an operating margin exceeding 10 per cent this year.
Corporate profits in the US are near record levels, a condition that, coupled with improved business optimism, may drive IT spending for equipment, software and consulting work, according to Bloomberg Intelligence analyst Anurag Rana.
Cap Gemini shares rose 1.1 per cent to 79.22 euros in Paris at 9:05 on Monday. Igate fell 0.1 per cent to US$45.85 on Friday, for a 12-month advance of 28 per cent.
Taking over a rival with a strong presence in the US "makes sense" for Cap Gemini, said Sagar Lele, an analyst in Mumbai for Antique Institutional Equities.
While the Paris-based company's sales in North America increased about 12 per cent in the first quarter, excluding acquisitions, they fell as much as 16 per cent in some European markets like the UK and Ireland. Revenue overall grew 1.5 per cent during the period, to 2.76 billion euros.
"The North American market is doing really well - it continues to surprise us in a good way," Cap Gemini CFO Aiman Ezzat said during the call.
Igate, which got about 70 per cent of its revenue from the US last year, provides consulting and technology outsourcing services to companies ranging from banks to electronics- manufacturing and chemical companies. The Bridgewater, New Jersey-based company said in January it won 29 new clients, as sales last year increased 10 per cent to U$1.27 billion, accelerating from 7 per cent growth a year earlier. It had 3,751 employees at the end of 2014.
Cap Gemini said the purchase should boost adjusted earnings per share by at least 12 per cent in 2016 and 16 per cent in 2017.
The French company said it will finance the purchase with cash, debt and shares, though it won't dilute its share capital by more than 6 per cent.