Tag: mergers & acquisitions

Capgemini Acquires IGATE to Power North American Ambitions | Sherpas in Blue Shirts

Today, Capgemini announced the merger agreement to acquire IGATE for $4.04 billion. IGATE is a US-listed technology and services company headquartered in New Jersey with US$1.27 billion in revenue in 2014. The sale of IGATE has been in the offing for a while after private equity company, Apax Partners, which financed most of IGATE’s US$1.2 billion acquisition of Patni Computer Systems in 2011, converted its debt into equity in November 2014 (becoming its largest shareholder) and also filed with the U.S. Securities and Exchange Commission to have the option to sell its stake. The combined group will have nearly US$13 billion in annual revenue and 177,000 people globally. Capgemini aims to realize revenue synergies of US$100-150 million (through cross-selling and account farming) and cost savings of US$75-105 million over the next three years. The deal’s size and cross-ranging implications make it one of the most significant transactions in the IT-BPO industry. Capgemini is paying a premium for its North American ambitions, over 3x revenue multiple. It outstrips other such deals in the marketplace, notable CGI-Logica (2012) and IGATE-Patni (2011), indicative of the scale and urgent imperative driving deal rationale.

Major acquisitions in the IT-BPO market (US$ million)

Major acquisitions in the IT-BPO market

What works?

Prima facie it gives Capgemini a sizable foothold in the North American market, the biggest IT outsourcing market in the world. North America becomes a significant market for the combined entity, comprising nearly one-third of 2015 projected revenue, up from 20% for Capgemini earlier. Europe will still account for over half of the combined revenue. The North American region contributed nearly 80% to IGATE’s revenue in 2014, with marque clients such as GE and Royal Bank of Canada. This had increasingly become important for the company since its French-rival Atos bought Xerox’s North American ITO business late last year. That deal also made Atos the primary IT services provider to Xerox (~US$240 million annual revenue) and also have the right to first refusal on collaborative opportunities with Xerox.

It enhances Capgemini’s delivery presence in offshore/low-cost regions specifically India, where most of IGATE’s 33,000-strong workforce is based. Capgemini had earlier acquired Kanbay in 2006 with a focus on increasing India operations. It also bought Unilever’s India GIC – Unilever India Shared Services Ltd (UISSL) – in parts over 2006-2010. Around two-fifths of Capgemini’s global workforce of 144,000 employees is based in India, with the combined group having an offshore leverage of nearly 55% by the end of 2015, comprising over 90,000 people.

The move adds greater definition to the verticalization maneuvers Capgemini had been driving of late. IGATE’s strong BFSI client roster (CNA, Royal Bank of Canada, MetLife, UBS, Morgan Stanley), comprised over two-fifths of its revenue last year. Similar synergies are expected in manufacturing, healthcare, and retail sectors.

Capgemini’s functional spread stands to gain on account of IGATE’s mixture of IT and BPO services. Specifically, Capgemini has been looking to grow its ADM and BPO business, as enterprise clients exhibit a preference for integrated services stacks led by an expanding As-A-Service economy, combine infrastructure, application, and business process service needs. This is the driving force behind IGATE’s business model – ITOPS or Integrated Technology and Operations, which will help Capgemini position itself as a fully integrated service provider. The deal also holds Capgemini in good stead, bolstering its industrialization play. As the value proposition in the global services space moves beyond labor arbitrage, service providers are looking at non-linear IP-driven revenue sources through products, platforms, and solutions. IGATE has monetized the ITOPS value proposition through productized applications and platforms – IDMS (for BFS), IBAS (for TPA clients), and SIB (for retail customers) – which are distinct P&L-plays for the company. Capgemini is also likely to receive additional tax benefits from the deal, as it is carrying a large deferred tax asset in the U.S.

The uncertain

The adage “culture eats strategy for breakfast” couldn’t be truer for this merger. There is a stark cultural tension with a Europe-heritage firm struggling with offshoring trying to integrate an Indian IT service provider with a strong North American client roster. Plus all is not rosy with IGATE. One of its largest clients, Royal Bank of Canada, has been facing problems for its use of IGATE services while GE’s contribution to revenue has been falling. CEO Ashok Vemuri’s hire-for-growth plan witnessed a bump when Q4 2014 headcount actually fell by about 900 employees. IGATE registered an annual revenue growth of just 10% to $1.27 billion in 2014, lagging other IT peers. On the executive front, the merger means uncertainty for Ashok Vemuri, who left Infosys specifically to take over as CEO after Phaneesh Murthy left. His dream of staying a CEO might be curtailed, and he will be tempted to move on, as he wouldn’t want to occupy a role similar to what he held at Infosys, with even less leverage with the leadership. This potential void in leadership could pose a major hurdle for the integration process.

The road ahead

The move is indeed a bold one by Capgemini to catalyze growth, plug delivery/regional/vertical gaps, and streamline operations. IGATE is the right size for Capgemini to absorb – not too small so it does not have a tangible impact but not so big that to create an integration struggle. The sizable deal size could spur U.S. giants to action. Given Capgemini’s European legacy, other regional service providers could mull their options in a bid to expand their operational footprint. We have already seen recent activity in Europe with the Steria-Sopra merger last year. MNCs struggling for growth and looking at globalizing delivery could start thinking of mid-sized players as possible targets. Some of these players have growth issues, significant PE investments, scaling problems – all of which make a good rationale for a merger with a bigger player. On the other hand, the deal lacks some specific attributes when it comes to next-generation technology tenets such as cognitive computing, automation, digital, and analytics. Moreover, Capgemini will need to bridge the inherent disconnect between two different cultures, systems, processes, and people, to make this integration successful. The deal is certain to spark further consolidation and conversations, as service providers witness pricing pressures, evolving engagement models, and increasing anti-incumbency, in a bid to adapt to the As-A-Service construct.


Photo credit: Capgemini

Services Industry on the Cusp of a Changing Provider Landscape | Sherpas in Blue Shirts

I’ve blogged before about consolidation in the services industry, and I believe the industry is now on the cusp of a new round of significant acquisitions. But don’t expect a repeat of the usual M&A strategy. We’ll see a shift from the usual tuck-in acquisition strategy to billion-dollar-capability acquisitions. At this game-changing level, consolidation could have an immense impact on the industry.

Market conditions are ripe for consolidation: a maturing marketplace, the cost of capital is very low and there is a changing perspective in executive ranks toward major acquisitions. As a result, the number of highly acquisitive players has jumped dramatically.

Cognizant led the way with its TriZetto acquisition, which changed the game in terms of size. ATOS acquired the infrastructure arm of Xerox. At Everest Group we also see Capgemini, Fujitsu, Genpact, NTT Data and Wipro as highly acquisitive players. And we wouldn’t be surprised to find others driving consolidation.

It will be interesting to see who these companies acquire – and whether they will acquire each other.


Photo credit: Flickr

Change Is Coming to Global Services | Sherpas in Blue Shirts

In observing the global services industry players in recent weeks, I was amazed at how much frenetic activity India’s providers undertook in joint ventures and acquisitions in Q4 2014. What does all this noise signify? Change is coming.

There are signs that let us know seasonal changes are coming. Before winter arrives, we see its signs in leaves changing colors, birds migrating south and days getting shorter. One of the signs of change coming in the services industry is when incumbent providers go on an acquisition and alliance spree.

Let me highlight just some of the spree of activity in the past few months.

  • Cognizant
    • Acquired TriZetto, a healthcare software vendor
    • Acquired Odecee, providing digital solutions to enterprises in Australia and New Zealand
  • Genpact
    • Created an alliance with Top Image Systems to increase its automation capabilities in F&A
  • Infosys
    • Undertaking a significant shift in its M&A strategy. After completing only five acquisitions since its inception, Infosys recently aggressively bid on Trizetto, but lost to Cognizant. And it’s considering several strategic acquisitions with annual revenue of $600-$700 million.
    • Partnering with DreamWorks animation
    • Partnering with Tableau Software for big data, visualization and business intelligence solutions
  • Tech Mahindra
    • Acquired Lightbridge Communications, a telecom network engineering service provider
  • Wipro
    • Extended partnership with Red Hat for open hybrid cloud solutions

And it isn’t just the Indian providers who are on a spree. Examples:

  • Acquire BPO acquired Shore Solutions in the Philippines
  • Capgemini is partnering with NetSuite to provide a scalable cloud-based back-office solution and is also partnering with Adaptra to provide insurance industry solutions in Australia
  • Citigroup is setting up its own IT arm in India
  • IBM agreed to acquire Lufthansa’s IT infrastructure unit

Individually, none of these events is particularly important, just as one duck flying south isn’t important. But when the sky is full of ducks, you can be pretty sure the season is changing.

Collectively, this spree of activity, especially by the Indian service providers, is an indication that the services industry is at an inflection point. Change is brewing and the providers are attempting to position themselves for the change.


Photo credit: U.S. Fish and Wildlife Service Headquarters

Cognizant Acquires TriZetto: The New “Big Blue” of Healthcare IT? | Sherpas in Blue Shirts

Today, Cognizant announced the acquisition of TriZetto® (a leading provider of healthcare IT software and solutions) for US$2.7 billion. The deal ties in favourably with Cognizant’s dominant position in the healthcare IT marketplace, with the combined entity having US$3 billion in healthcare revenue. TriZetto has around 3,800 employees across the U.S. and India, who will join Cognizant’s existing healthcare business, which currently serves more than 200 clients.

The acquisition is a landmark deal within the Indian IT service provider community, given the size, scale, intent, and implications to the status quo, but what makes it unique is its focus on industry solutions vs. other services-centric acquisitions.

Indian IT service providers’ notable acquisitions

 

What it means for Cognizant’s services focus

TriZetto primarily develops and licenses IT platforms and service for healthcare providers and payers, competing with the likes of Allscripts, DST Systems, and McKesson. Cognizant aims to leverage its dominant position in the market–a healthcare IT portfolio in excess of US$2 billion–to provide an integrated portfolio across services and platforms. Investing in products and solutions has been a key area of focus for Indian IT service providers as they look to embed their solutions within enterprises buyers, use technology adjacencies, and leverage the technology-platform model instead of flexing just the labor arbitrage card. This acquisition could be one of the steps allowing Cognizant to cross-pollinate and build an integrated (applications/infrastructure/business process services) services play in an industry in which it has primarily relied on its application services strengths. 

What it means for Cognizant’s growth story

Cognizant will get access to multiple software platforms and aims to realize nearly US$1.5 billion of potential revenue synergies over the next five years. TriZetto currently operates at 18.5% margins on a revenue base of US$711 million. The numbers are right in the zone for Cognizant, as it wants to continue to drive its growth-plus-margin story in the high revenue base in which it currently operates. The products, platforms, and solutions play has very unique challenges, opportunities, and operating dynamics. Whether Cognizant can navigate this fundamental transition and still maintain its growth story, will be an interesting study.

How it relates to the way Healthcare IT industry is evolving

The ongoing transformation in the U.S. healthcare system is shaping service provider’s strategies as they look to capture the incremental opportunity that is up for grabs. The focus on driving down healthcare costs, wide-sweeping reforms (driven by Obamacare and ICD-10), and blurring lines between payers and providers, are principally reshaping the healthcare delivery model. Cognizant will aim to drive increased stickiness with healthcare buyers to drive retention in an increasingly complex vendor landscape. It is aimed at garnering a large share of the growth pie, when it comes to the payer and the provider ITO market. This acquisition is an unmatched clear indication that service providers must evolve from a services-only play to a platform-based solutions play, to stay relevant in a market that has an immense potential to grow.

 

What this means for the competition

The deal will also have myriad implications for the overall healthcare IT services competitive landscape. Most competitors of Cognizant already have a steady revenue stream (large or small) implementing TriZetto solutions, most importantly Facets™, which is used by most payers in the U.S. How this impacts its engagements and partnerships will be tricky. Whether Cognizant will want to (and if so, how) assume a dichotomous role of a partner and competitor will be another interesting area to watch. Additionally, whether Cognizant plans to ultimately absorb TriZetto (thereby dissolving the brand) or leverage its unique positioning is also unclear.

Cognizant is ideally placed in healthcare with few like-sized competitors, allowing it to consolidate. Two things that are definitely salient here–one, Cognizant is going all out to bet big on healthcare; and two, this acquisition has the potential of taking it to a different league altogether! There are already murmurs in the healthcare IT industry equating Cognizant to a new “IBM,” when it comes to its negotiating power at the table. This is another step in ensuring it stays ahead of peers as the competitive intensity in the market increases. The deal definitely has characteristics of a long-term strategic bet than a tactical manoeuvre.

Download the complimentary breaking viewpoint: Cognizant Acquires TriZetto for US$2.7 Billion.

Capita Expands in Ireland | Sherpas in Blue Shirts

Capita has acquired SouthWestern Business Process Services Limited from private equity group Ion Equity, for €35m (£28m). SouthWestern provides customer relationship management, financial shared services, data processing and inspectorate services to private and public sector organizations. It has delivery centers in Ireland, the UK and Poland. Clients include the Department of Agriculture Food and Marine, Bord Gáis, the Department for Environment, Food and Rural Affairs, Bord Bia, Eircom and Failte Ireland.

SouthWestern is expecting revenues of €33.6m and an operating profit of €3.4m for 2014.

This is not the first Capita acquisition in Ireland. In 2011 it invested €33 million to acquire the international financial services business of Allied Irish Bank, AIBIFS. It integrated the acquired business with its own investor and banking services division, which at the time employed 2,000 people in Ireland, the rest of Europe, and India.

Capita already operates in Ireland, including as “servicer” to the National Asset Management Agency (NAMA) and contracts with Prudential International Assurance, St James’s Place International and Ireland’s Department of Communications, and Energy and Natural Resources to manage the delivery of a new postcode system across the country.

In 2013 it opened new offices in Dublin and at the time it had a target of employing circa 800 people in Ireland. That target has grown to 1600 since and SouthWetsern brings circa 1000 FTEs. These are mostly based in two sites at Co Cork, at Clonakilty and Little Island, as well as at smaller sites in Lodz, Poland, Dublin and Milton Keynes in the UK.

SouthWestern enhances Capita’s contact center capabilities. It offers multilingual customer services, supporting in up to 14 languages with 24/7 voice and multichannel services. Its other services, such as financial services administration, debt collection and risk management are a good fit to Capita’s existing but currently largely UK-focused services. SouthWestern also brings Capita a bigger presence in the Irish public sector market, which it will be able to expand fast given its long and successful experience in the UK public sector.

Capita’s plans for SouthWestern are ambitious. It is aiming to more than double SouthWestern’s operating profit to €7m and increase its revenue by 40% to €47m in 2016. An investment in SouthWestern’s IT systems in 2015 is to support this growth. Another factor to take into account is a strong pipeline of opportunities. In its H1 204 results, Capita indicated a pipeline of £5.7bn. These included 27 bids of which 90% relates to new business and 10% to contract renewals.

Both Capita and SouthWestern have delivery centers in Poland (Krakow and Lodz respectively). The Polish centers are likely to be consolidated but any additional capacity would help Capita with its plans for growth in Continental Europe. The move to expand into Europe was signaled by Capita’s acquisition of tricontes, a specialist customer management company based in Munich, Germany, for an undisclosed sum in July 2014.

While Capita has always been very acquisitive, a strategy for expansion beyond UK borders is emerging since the new head, Andy Parker, took over from long-term CEO Paul Pindar, this year. We will be watching this space to provide additional commentary in the future.


Photo credit: Charles Clegg

Accenture and IBM Playing from the Same Playbook in Shaping Their Future | Sherpas in Blue Shirts

Accenture appears to be picking up its pace of acquisitions and making a series of big moves. This is not a new tactic for Accenture; historically nearly every time you turned around there was another Accenture acquisition. But clearly the pace has quickened and the size of the acquisitions has increased. It’s important to understand how this acquisition strategy helps to shape the provider’s future, for it sends a signal to the entire industry.

Like IBM, I think Accenture recognizes that the services market is changing, so it seeks to move into new territories. The April 2014 acquisition of i4C Analytics vaults Accenture securely into the digital world, and acquiring Procurian in 2013 launched the firm’s procurement group services. Both of these acquisitions are examples of creating access to new markets in which Accenture will be able to navigate the changing services marketplace and ensure they are in the leadership position for next-generation services.

Any service provider tries to grow its practice organically, particularly when it creates offers that are significantly different from their existing offers. However, this strategy is difficult, slow and expensive, and it often confines a provider to a lower market share. Both IBM and Accenture are using the same playbook — moving to deal with this dilemma by buying fully formed companies with established value propositions and working business models that have already been developed and perfected.

Accenture historically developed practices from scratch and successfully scaled them, so spending more time and resources acquiring companies is a bit of departure for Accenture. But we at Everest Group think Accenture’s strategy is to marry acquisition into its impressive record of organic development rather than a complete sea shift in developing new offers.

I think we can look forward to an ongoing acquisitive posture from Accenture as it seeks to extend its businesses. The provider is paralleling IBM’s well-demonstrated move into new service areas through acquisitions, and seeking to drive explosive or significant growth off the new platforms.

EXL Positions Itself for Growth with Acquisition of Blue Slate | Sherpas in Blue Shirts

Earlier this month EXL acquired Blue Slate Solutions and positioned itself for growth through transformation services. But the move also reflects a broader industry move.

Blue Slate is a consulting firm that drives operational transformation. The acquisition looks to be a move to buttress and increase EXL’s ability to add value to clients through driving large-scale transformational projects. It also improves EXL’s industry expertise in critical areas such as healthcare.

And it will better position EXL to compete. The Blue Slate acquisition matches Genpact’s investments to add similar capabilities and also allows EXL to compete more effectively with Accenture and IBM on large-scale transformational opportunities.

So it’s a nice acquisition. But it also has broader significance. As we think holistically about this, EXL is joining a broader industry move ­of players positioning themselves to transcend or add value beyond operational excellence.

Tech Mahindra Puts Satyam to Bed | Sherpas in Blue Shirts

Tech Mahindra has run the gauntlet of stabilizing after its acquisition of the corrupt-ridden Satyam. The fully integrated companies have a unified leadership team, the client base is satisfied and stable, and Tech Mahindra has a robust brand. The provider is now turning its focus to growth.

When Satyam imploded through a well-documented set of corruption cases, Mahindra stepped forward to acquire its assets and, by extension, stabilize the Indian heritage services industry.

It has been a long, difficult journey for Tech Mahindra, more difficult than anticipated. Mahindra had to wrestle with rooting out the corrupt practices, getting the books restated, negotiating with the regulatory bodies and shareholder lawsuits, satisfying a concerned customer base, dealing with a nervous employee base and transitioning from the tainted Satyam brand to the robust but less well known Tech Mahindra brand.

Although there was some client flight, many clients chose to stay and wait it out. These clients are now satisfied and pleased with the progress Tech Mahindra has made.

Kudos to Tech Mahindra for enduring the journey to a successful outcome. We’ll watch with interest as they now focus on growth.

Accenture Goes for More Analytics | Sherpas in Blue Shirts

Earlier this week, Accenture announced that it has acquired PureApps, a UK-based specialist in Oracle-based Enterprise Performance Management (EPM). PureApps enables clients to analyze financial data to gain insights into corporate performance, to measure and improve organizational effectiveness, and alignment to strategy. PureApps enhances Accenture’s capabilities for services to the CFO, and enhances its consultancy services in the UK and Europe and global shared services offering. This is good timing by Accenture when many large organizations are looking to get increased visibility into their financial performance.

PureApps is to be integrated into Accenture’s Finance and Enterprise Performance practice, part of Accenture Strategy. The acquisition fits into Accenture’s focus on increasing its analytics capabilities through acquisitions.

Another recent example of this strategy is the acquisition of i4C, announced on 30 April 2014. Italy-based i4C is a provider of advanced analytics applications (AAAs), turn-key industry- and function-specific solutions. The i4C ACE platform allows analytics to be built and integrated into workflow without the need to do any coding. It uses industry specific logic and maps business processes into the application with configuration tools. Its portfolio includes some applications for energy, finance, retail, manufacturing, and telco sectors and a set of other applications, such as predictive asset maintenance tools.

Everest Group estimates that the market for analytics BPS, alone, is set for 30% CAGR to 2015. Accenture has made steady investment in its analytic capabilities over the years but the most recent acquisitions, those of PureApps and i4C, in quick succession show that the service provider is positioning for the predicted growth in demand for analytics. It is also filling the gaps in its portfolio by adding different flavors of analytics (e.g., EPM and predictive analytics) to its existing capabilities such as customer analytics.

Genpact Pharmalink Acquisition Echoes Other Providers’ Efforts to Deepen Life Sciences Expertise | Sherpas in Blue Shirts

On April 23, Genpact announced it had signed an agreement to acquire Pharmalink Consulting, a global provider of regulatory services to the life sciences industry. The move brings Genpact valuable expertise in supporting life sciences research and development functions including regulatory strategy, filing submissions, complex compliance services, and post-licensing activities management. And it well complements Genpact’s traditional stronghold in FAO BPO for major pharma clients.

This strategic play is in line with a wider move by generalist IT-BPO service providers to compete with life sciences technology and process majors such as Accenture and Cognizant. These generalists are ramping up their capabilities in domain-specific areas including drug safety, regulatory services, pharmacovigilance, and clinical data management, to enable more broad-based engagement with pharma customers.

Life Sciences Regulatory Imperatives

Life Sciences Regulatory Imperatives

The already complex life sciences regulatory landscape is further compounded by stringent quality measures, new drug approval regulations, restricted sales force access to physicians, increasing scrutiny of manufacturing processes, improving collaboration among regulatory agencies, and enhanced pharmacovigilance legislation. We estimate that compliance-related IT spending amounts to nearly 15 percent of the total IT budget of life sciences firms, with three to five percent annual increment.

Recent European data protection regulations call for greater control of personal data. Newer provisions include use of health data for only “absolutely necessary” purposes, as well as an additional onus on data controllers to formulate methodologies to adhere to “data minimization” practices. Pharmacovigilance, drug safety, and clinical data management have become key imperatives in this scenario. New technologies and systems can enable organizations to tackle the regulatory puzzle. 

The Inorganic Route to Enabling Domain Expertise

Inorganic Route to Enabling Domain Expertise

In a significant change and recognition of new market realities, nearly all IT majors have separate business verticals specifically targeting clinical data management and pharmacovigilance. In 2011, Accenture even tied up with the Institute of Clinical Research in India (ICRI) to jointly develop a pharmacovigilance and clinical research program for the Indian market.

And in the last couple of years, there has been an increasing impetus on behalf of service providers to look at M&As to acquire these specific areas of expertise in the life sciences domain. For example, the Accenture/Octagon deal in 2012 signalled an important shift in focus as Accenture attempted to combine its life sciences offerings by adding elements of regulatory management and SI/consulting to have a more integrated portfolio with a cross-functional view. This is based on the belief that the marriage of functional expertise in conventional process-oriented outsourcing services with industry expertise across regulatory, drug safety and clinical trials, make for a very compelling business case. Additionally, regulatory work has been largely project-based, and typically short-term. The enhanced value players bring to the table can translate into longer and more meaningful IT-BPO engagements.

The moves by Accenture and Genpact herald the transformation of life sciences customers’ expectations for greater consolidation and efficiency in the aspects of regulatory activities management, bringing together different tenets such as clinical data management and pharmacovigilance. Service providers that seek to explore, leverage, and consolidate adjacencies in current scope of work, and assume a consolidated and integrated approach to IT-BPO services, will end up with a greater share of the life sciences pie.

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