Capgemini’s IGATE is no copy of Xerox

Contact: Scott Denne

Not content to be France’s second-largest outsourcing company, Capgemini answers Atos’ Xerox buy with the $4bn purchase of IGATE Global Solutions. From a strategic perspective, Capgemini’s deal and the recent acquisition of Xerox’s ITO business by local rival Atos are quite similar. But from a valuation perspective, they couldn’t be more different.

Both transactions aim to shore up the North American businesses of the two France-based outsourcing companies. Following today’s deal, North America will account for 30% of Capgemini’s $13.6bn anticipated pro forma revenue this year, while Atos’s acquisition (announced in December) boosts its own revenue in that region to 17%, from 6%, of its total.

The similarities end there. Capgemini’s purchase values IGATE at 3.5x trailing revenue, making it the highest multiple we’ve tracked on a $500m-plus pickup of a North American outsourcer in seven years. Atos, on the other hand, paid 0.7x trailing revenue for an asset with about the same revenue. IGATE posted a percentage point or two of additional revenue growth in each of the past few years.

Profitability is the difference in the two assets. IGATE had a $79m gain on its bottom line last year – right at the midpoint of the previous two years’ profits – and operating margins of 23%. Compare that with Xerox ITO’s 8% on a $112m loss – though it did post $46m and $31m in profits in the two previous years.

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