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A SPECIAL ANNEX NEWSFLASH
Business Week Story Provides New Grist for Rumor Mills
A Takeover Target?
Low Stock Price to Lure Value Prowlers, Say Some Analysts
PHOENIX, Oct 4 - Is Capgemini a takeover target? Yes it is, according to several analysts quoted in today's Business Week story, "Is Capgemini for Grabs?", filed from its Paris bureau. Not so fast, we say...
First, as we also told the Business Week reporter (see the quote below), when you acquire a company, you also get its headaches:
Second, to make an acquisition work, there has to be synergy in cultures, not just numbers. With a possible exception of Fujitsu, we see very little of that among the possible suitors mentioned by Business Week (IBM, Hewlett-Packard, Computer Sciences, Atos Origin, Siemens, British Telecom, Deutsche Telekom, Fujitsu).
Why Fujitsu? Not because of cultural similarities. We see none. But the second largest IT services company in the world (after IBM), Fujitsu has been trying to expand its international presence in the global services market as Japan still accounts for three quarters of its business (see "Back in the Black," Aug 2004).
A possible Capgemini takeover would certainly fit the goal of expanding Fujitsu's overseas business. And it might work because the Japanese tend to leave their acquisitions alone. They let the local management continue to run the company, and only exercise financial control over the prey.
Furthermore, the two companies have already cooperated successfully in winning one of Europe's largest outsourcing deals last year - at Inland Revenue in the U.K. (see Biggest Feather in Cap's Cap, Dec 2003). And success breed success...
Blue Skies Ahead?
Apart from the Fujitsu possibility, we see few reasons why Capgemini management would agree to a takeover now that some blue skies lie ahead - something the Business Week also noted in its sub-headline ("...and what seem to be the IT-services outfit's solid prospects for a comeback ").
At just under €20, the Capgemini stock may have bottomed out now (see
the above chart). While still far down (12-fold) from their peak in March 2000, there are a number of fundamental reasons that may boost the share prices. Here's what we also told the Business Week:
The Business Week story helped push the Capgemini stock up as much as 5% in today's trading, adding some $182,000 to its €2.6 billion-market cap ($3.3 billion) in heavy trading (the volume was about 50% higher than the average number shares traded daily). And the stock may keep rising if investors pay attention to Cap's improving fundamentals.
If the current trends continue, Capgemini will be back in the black by the end of 2004, and will continue to grow both its top and bottom lines next year (see the above chart).
But it's not all a bed of roses in Capgemini's bedroom. As the equity declined and debts increased, the company's debt-to-equity (D/E) ration has risen from 0.08 last year, to 0.14 in its latest fiscal report.
Alas, such is the price of success. Capgemini's D/E ratio at the peak of its successes (in March 2000) was 0.20 - higher than what it is today. To win big deals and finance its restructurings, the Capgemini has had to take on more debt.
Indeed, that Capgemini appears to be on the mend was the bottom line of the Business Week article. "(The CEO Paul) Hermelin expects double-digit revenue growth in 2004's second half," Business Week said. "That means any potential suitor will have to move fast."
Or not at all. After all, "leaving well enough alone" is an ancient pearl of wisdom.
Happy bargain hunting!
For additional Annex Research reports, check out...
2004: Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); Fujitsu: Back in the Black (Aug 2004); Oracle: Unbreakable Spirit (Aug 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004); IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004); EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004); IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)
A selection from prior years - Cap:
Analysis of CGE&Y 2001 Results (Feb 21, 2002), Analysis of Cap Gemini Ernst & Young 2000 ... (2001), CGG 1999 Preliminary (Mar 10, 2000), CGG Annual Report 1998 (June 18, 1999), CGG: The Most Improved (1998)