By Niclas Hallberg (London School of Economics) and Vincent Wess (WHU - Otto Beisheim School of Management) | 16/02/2020
Overview of the deal
Acquirer: Capgemini SE
Target: Altran Technologies SA
Estimated value: $3.7B
Announcement date: 24.06.2019
Acquirer Advisors: Lazard
Target Advisors: Perella Weinberg Partners
Capgemini and Altran are closing in on creating a global leader in the digital transformation consulting landscape. After asserting that its June 2019 offer of €14.00 per share was final, Capgemini increased its tender offer for Altran mid-January 2020 to €14.50, thereby increasing Altran’s valuation from €3.6B to €3.7B.
The sweetened bid was to convince a majority of Altran’s shareholders to sell their shares, after the deal stalled thanks to opposition from US activist hedge fund Elliott Management. Elliott, who own about 14% of Altran’s equity, have argued that Capgemini was undervaluing Altran, hence making shareholders hesitant to sell at the current valuation of €3.6B. On January the 22nd, Capgemini managed to acquire 53.6% of Altran’s shares.
Paul Hermelin, Capgemini’s CEO, thereby secured the consultancy’s biggest deal in a decade. Even though Capgemini will struggle to fully acquire Altran, the majority shareholding will lead to plenty of cross-selling opportunities and cost savings in the future, making the deal highly accretive.
Company Details (Acquirer - Capgemini SE)
Capgemini is a global leader in the provision of consulting, technology, digital transformation and outsourcing services to its clients. Founded by Serge Kampf in 1967, the French multinational has a strong focus on transforming businesses through the adequate implementation of technology. The group has two specialized subsidiaries: Capgemini Invent provides services based around digital innovation, while Sogeti operates on a local level, deploying expert teams that aim to implement existing technologies in businesses.
- Founded in 1967
- CEO: Paul Hermelin
- Number of employees: 225,000
- Market Cap: $19.6bn - EV: $21.9bn
- LTM Revenue: $ 13.7bn - LTM EBITDA: $1.8bn
- LTM EV/Revenue: 1.59x - LTM EV/EBITDA: 12.33x
Company Details (Target - Company Name)
Altran is the global leader in engineering and innovation consulting. Headquartered in Paris, it specialises in advising its clients, some of the world’s largest corporations, on the implementation of high technology in their businesses, making up 75% of its revenues. The remaining revenue is generated through information, administrative and management consulting.
- Founded in 1982
- CEO: Dominique Cerutti
- Number of employees: 50,000
- Market Cap: $3.8bn - EV: $5.7bn
- LTM Revenue: $3.3bn - LTM EBITDA: $330m
- LTM EV/Revenue: 1.71x - LTM EV/EBITDA: 17.03x
Projections and Assumptions
Together, Capgemini and Altran will create an entity with €17bn in revenues and a total of 250,000 professionals. Capgemini said the acquisition would give them the critical mass that they need in software engineering and a strong presence in geographies that they want to grow in. Besides the strategic rationale, the financial profile of the transaction is also very attractive.
The two companies expect EPS accretion of roughly 15% in year 1 and post-synergies normalised EPS accretion of more than 25% by 2023. This is driven by several factors, including a high potential for synergies. For cost synergies, they aim to improve the operational efficiency through purchasing as well as facilities optimisation and expect annual run-rate synergies of between €70m and €100m. As a combination of an IT consultancy and a consultancy in the OT (operational technology) space, this transaction offers great potential for cross-selling, especially when considering that most of their projects require expertise from both areas. Cross-selling is also further promoted by the addition of an extremely strong client portfolio to Capgemini’s business including companies like BMW, FCA/PSA, Airbus, Engie, Cisco and Vodafone. The total projected revenue synergies range from €200m to €300m.
The EPS accretion is also driven by growth in the companies’ primary markets. The engineering and R&D services market is expected to grow by 9% p.a. by 2022 which is largely due to growth in the software & internet industries (>12%) as well as the semiconductors & electronics, life sciences and communication industries (8%-12%). Lastly, analysts also see a strong case in the integration of the two companies. Both companies are French consultancies with very similar operational structures and correspondingly similar cultures which, despite being overlooked at times, can be a critical aspect in a successful acquisition.
Long Term Upsides
In recent years, many firms in traditional industries have seen the need for restructuring their business models in the face of digitalisation. These developments are in some cases referred to as the fourth industrial revolution and consultants correspondingly try to boost their offerings in the fast-growing business of digital transformation.
As the global leader in the field of IT consulting, Capgemini argue that partnering with the number one engineering and R&D services consultancy creates a unique combination of expertise that places the firm in an exceptional position to support the digitalization of industrial companies. Capgemini is active in projects concerning AI & analytics, data engineering, Internet of Things systems and 5G, whereas Altran is a leader in software engineering, product and system engineering and manufacturing. Hereby, Altran is not merely the best player in Engineering and R&D services but they also have other characteristics that can be very helpful in the future. Altran has a good standing in geographic markets with the largest industrial industries, for example. Furthermore, it has a diversified industry mix with the two largest sectors, Automotive & Aerospace and Defence & Retail only taking up 20% each. In particular, they have a strong position in their R&D business given that their client portfolio includes most of the world’s top 20 R&D spenders, such as Johnson & Johnson, Samsung, VW, Microsoft and Siemens.
Finally, Capgemini aims to become a leading software engineering company. The plan to become a close partner of internet and independent software vendor (ISV) companies is supported by the acquisition, as Altran’s client base hosts 6 of the top 10 and 26 of the top 100 ISV companies as well as 5 of the top 25 internet companies. Also, they want to combine at scale Altran Software Engineering capabilities through ex-Aricent and Lohika with Capgemini capabilities in DevOps, Cloud, Data and AI.
Risks and Uncertainties
The deal took place in a tense climate, as French companies have recently been under pressure from activist investors. The French-Italian EssilorLuxottica, a global leader in eyewear and eyecare, is being targeted by Third Point; additionally, Elliott Management recently put pressure on drink-maker Pernod-Ricard to increase margins and review corporate governance. Despite Capgemini succeeding in closing the deal amidst accusations of irregularities brought forward by Elliott, corporate governance is likely to remain a hot topic in the near future. This places Capgemini’s integration practices under the spotlight, and the firm is likely to be heavily scrutinized.
Valued at €3.6 billion, the acquisition is one of the largest in Capgemini’s history. This implies a significant amount of time and resources will be required to seamlessly integrate Altran with Capgemini’s existing business. The substantial effort required for integration may shift focus away from the company’s ordinary operations, which could suffer as result. Both companies have cited cultural proximity and similar operating models as guarantees of smooth integration, however it is unclear to what extent these factors will help extract synergies in the short term. Nevertheless, the complementary nature of Capgemini’s IT capacity and Altran’s engineering and R&D services will facilitate the strategic alignment of the firm’s lines of business.
Moreover, the deal comes with a significant increase in the combined entity’s leverage. The all cash transaction was made feasible by Capgemini securing bridge financing of 5.4€ billion; whereas Altran itself carries high debt from its previous 1.7€ billion acquisition of Aricent. This spike in debt will prove problematic if the forecasted synergies aren’t realised; however, the strategic rationale for the deal is sufficiently solid to suggest the likelihood of this happening is low.