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.