In the middle of 2013, we predicted a wave of acquisitions that would lead to consolidation in the service provider space. Developments over the last 18 months have not proven us wrong.q
In that time, we have seen an increase in M&A activity among service providers looking to grow in new markets, enhance capability, or manage risk in an environment where traditional business models are being disrupted by rapid digitization and automation of services.
The latest and largest deal came last week when Capgemini announced plans to acquire IGATE for just over $4 billion. What makes this transaction especially interesting is that it is the largest ever involving an Indian-heritage provider. Capgemini, a multinational management consulting firm, is not only obtaining a strong foothold in the North American market with its intended purchase of IGATE, a US-based technology services company, but it is acquiring IGATE’s significant work force in India. According to ISG research, the move will immediately double the size of Capgemini’s India operations, with more than 45 percent of the combined Capgemini-IGATE global work force to be located there.
While this is a significantly lower percentage than India-based companies like TCS, Infosys and Wipro, each of which has nearly 80 percent of its work force in India, the scale of Capgemini’s India operations will be comparable to other global competitors like Accenture.
Post-acquisition, the combined Capgemini-IGATE entity will employ around 190,000 people and have estimated annual revenue of $13.58 billion and a combined operating margin above 10 percent. The deal also balances Capgemini’s global profile, increasing its revenue from North America by almost 10 percent, while providing Capgemini with a strong list of financial services clients, which currently make up almost 42 percent of IGATE’s annual revenue. In addition to getting stronger in the banking, financial services and insurance (BFSI) sector, Capgemini also will add to its capabilities in manufacturing and engineering services.
Clearly, Capgemini is looking to go toe-to-toe with North American Tier 1 firms like IBM, Accenture and HP that have already invested in significant India-based operations to go along with their consulting businesses. These industry stalwarts now have even more reason to look over their shoulders.
Who wins in this deal? The clients of both firms are the clear beneficiaries in our view. With limited client overlap between the two firms, existing IGATE clients will gain access to Capgemini’s full-service portfolio of consulting, IT and BPO services and to its capabilities in emerging technologies such as digital and analytics. Meanwhile, existing Capgemini clients will gain more efficient and lower-cost outsourcing services as a result of its new offshore delivery capability.
Don’t be surprised if the Capgemini-IGATE transaction is a harbinger of even more consolidation in the IT services market. We have seen a clear trend of companies acquiring Tier 2 Indian service providers as a way to quickly grow their offshore operations. At the same time, we predict Capgemini and other global service providers will continue to pursue strategic acquisitions in the coming quarters to increase their capabilities in automation, cloud, analytics and other emerging technologies as they look to deliver the benefits of digital transformation to their clients, and capture new growth opportunities for themselves.
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About the author
John is a proven executive leader with strategic, transaction and post-transaction experience. John has helped many large, global enterprises introduce and cultivate innovation as a part of the transformation process. Many of John’s projects have led to groundbreaking transactions, particularly in the UK Life and Pensions market, where John is a sought after C-suite advisor in the strategic sourcing of insurance operations. John has also conducted significant transactions in both IT infrastructure and applications environments. As a Partner and President, he sits on the ISG Executive Board and leads ISG EMEA and Asia.