Atos reaches to North America again with $3.4bn Syntel buy

By Katy Ring, Mark Fontecchio

With its appetite for scale and global credibility, France’s Atos continues to spend heavily on targets outside of Europe. Today’s $3.4bn acquisition of US-based MSP Syntel should assist the buyer in developing North American market share – a recurring theme among the purchases it’s made since the $1bn pickup of Xerox’s IT outsourcing business in 2014.

Including debt, the deal values Syntel at $3.6bn, or 3.8x trailing revenue – a substantial premium for Atos, which had never hit 1x revenue on any of its $1bn transactions. Atos isn’t just paying above its norm, the valuation for Syntel surpasses the industry norm. According to 451 Research’s M&A KnowledgeBase, IT services and outsourcing targets fetched a median 2.3x revenue in the past five years. The high multiple highlights Syntel’s substantial North American sales and its ability to deliver services globally.

Two of Atos’ three previous $1bn-plus acquisitions were for US companies, yet its North American revenue declined 3.4% to $1.1bn in the first half. In addition to marquee clients such as American Express, State Street Bank and FedEx, nearly all (89%) of Syntel’s sales come from that continent. Moreover, although Syntel is a US-based multinational provider of integrated technology and business services, it is an offshore supplier with 78% of its workforce in India, which could bolster another of Atos’ weaknesses – global delivery capabilities.

Syntel has built a reputation for modernizing IT divisions for enterprises in financial services, healthcare and retail, all while retaining operating margins of 25%. Atos will look to graft this high-margin, offshore engineering capability, rolling out Syntel’s delivery model to its existing Business & Platform Solutions accounts to improve margins from 9.1% this year to roughly 11.5%. Atos expects about $120m in annual cost synergies from the merged businesses by 2021, as well as cross-selling opportunities that could add an additional $250m in revenue by 2021.

Rothschild Group, J.P. Morgan Securities and BNP Paribas advised Atos, while Goldman Sachs banked Syntel. The deal is expected to close by the end of this year. We’ll have a full report on this transaction in tomorrow’s Market Insight.

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Ness gets a scant sendoff

Contact: Brenon Daly

Three-quarters of Ness Technologies shareholders have backed the planned $307m take-private of the IT services vendor, clearing the way for the sale to Citi Venture Capital International (CVCI) to close by the end of the month. CVCI acquired nearly 10% of Ness in early 2008 and first offered to pick up the whole company in July 2010, according to the proxy filed in connection with the proposed deal.

Last summer, CVCI indicated that it would be looking to pay $5.50-5.75 for each Ness share it didn’t already own. Three financial buyers who also got involved in the bidding last fall indicated that they would be prepared to top that by about a dollar a share. In the end, CVCI agreed to pay $7.75 for each share, roughly one-third more than the opening bid from the buyout shop .

And yet, despite the topping bid, Ness is exiting the public market at what would appear to be a rather paltry valuation. The company recently reported that it was tracking to about $600m in sales for 2011, and yet is selling for just $307m. (Including Ness’ small net debt position, the enterprise value of the deal is $342m.) That works out to a scant 0.6 times trailing sales – just one-third the median price-to-sales valuation for US publicly traded companies so far this year, according to our calculations.

Some of that can be attributed to the fact that IT services vendors typically trade at a substantial discount to other technology firms. And yet, even within recent IT services deals, 0.6x trailing sales is the low end of the range for most acquisitions. (For instance, EDS went for that multiple in its sale to Hewlett-Packard in mid-2008, while Perot Systems got more than twice that (1.4x) in its purchase by Dell in September 2009.) In fact, Ness is selling to CVCI for a lower price than it fetched on the open market more than three years ago when the buyout shop first took its stake.

Dell-Perot Systems: an expensive Texas tie-up

By Brenon Daly

To understand just how richly Dell’s bid values Perot Systems, consider this: the last time shares in the services company traded at the level Dell is paying, Dell’s own long-slumping stock was changing hands above $40. That was back in early 1999, just after Perot Systems went public. (As a side note on the IPO, five banks are listed on the prospectus; Goldman, Sachs, which advised Perot in Monday’s sale to Dell, is not one of them.) By early 2000, shares of Perot had dropped to below $20, and never again pierced the $20 level, much less the $30 for each share that Dell is handing over in its proposed $3.9bn purchase.

The offer means Dell is paying a price for Perot that the company hasn’t seen on its own in a decade. Put in numbers, Dell’s bid values Perot at 68% above the closing price in the previous session, and some 78% higher than the average price of shares over the prior 30 trading days. For its part, Dell stock was bouncing around $16 on Monday, having dipped about 4% on the announcement.

And when compared to a similar move by a hardware vendor to bolster its services arm, Dell’s planned purchase of Perot comes in at about twice as expensive as Hewlett-Packard’s $13.9bn reach for EDS in May 2008. Dell is paying 1.4 times trailing 12-month (TTM) revenue and 12.9 times TTM EBITDA for Perot. That compares to HP’s acquisition, which valued EDS at 0.6 times TTM sales and 5.7 times TTM EBITDA.