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PARIS—IT consultancy Capgemini is buying technology services group Kanbay International for $1.25 billion to accelerate its growth in India and bolster its position in finance consulting and in North America.

Capgemini, Europe’s largest IT consultancy, said on Thursday that the acquisition of U.S.-listed Kanbay would boost its earnings and margins.

“With this deal we will accelerate our long-term (margin recovery) plan,” Chief Executive Paul Hermelin told a conference call.

“The market banks on a 2008 (operating) margin. We will top that. We then want to lift our margin above 10 percent while limiting the group’s cyclical exposure.”

Capgemini also unveiled a forecast-beating 13.5-percent rise in third-quarter sales on Thursday but its shares trailed in negative territory after initially rising.

By 0903 GMT, the stock was down 1.3 percent at 43.47 euros, underperforming the DJ Stoxx European technology sector.

Analysts said the deal made sound strategic sense but looked expensive although it was not out of step with recent deals in India. The purchase of a company focused on financial services in the United States at a time when the U.S. economy could be slowing also worried some investors.

Several analysts also noted that part of the acquisition could be funded through raising 500 million euros in equity, which would somewhat limit the accretive potential of the deal.

Capgemini had been on the lookout for a large deal to bolster its growth in India, a country which offers low-cost, skilled professionals, under a plan to boost the margin of its outsourcing business and of its North American operations.

It recently bought a 51-percent stake in business process outsourcing (BPO) unit Unilever India Shares Services Ltd.


Hermelin told French radio Europe 1 he started negotiating with Kanbay, which counts banking giant HSBC has a key client, in January.

Capgemini is to pay $29 per share in cash, representing a premium of 15.9 percent to Kanbay’s closing share price on October 25. Kanbay has a market capitalization of $975 million.

Several analysts said that based on consensus estimates, the deal valued Kanbay at 2.5 times 2007 revenue and 27 times earnings.

“It’s an expensive company but it’s a company which is doing well,” Hermelin told Europe 1, saying Kanbay’s revenue was growing by some 30 percent a year. Kanbay achieved an operating margin of 13.5 percent in the first-half 2006.

The acquisition would boost its earnings per share (EPS) by more than 5 percent in 2007 and 10 percent in 2008 and triple Capgemini’s workforce in India to some 12,000 people.

India would become the group’s second-largest country, accounting for 16 percent of total headcount.

“The deal represents 17 percent of Cap’s market capitalization, would add 5 percent to sales at current margins of slightly above 10 percent,” Societe Generale analysts said in a note.

The French-based company, which had a net cash chest of some 800 million euros at end-June, said it could fully finance the Kanbay deal with its cash resources.

But it added it would not rule out raising up to 500 million euros in equity to fund further possible acquisitions.

“The deal has some obvious positives but we are concerned about the funding mechanism and have some concerns on the potential 500 million euros overhang,” Deutsche Bank analysts in a research note.

“In short, we need to get comfortable that we are not seeing a repeat of the type of deals we saw on the last cycle,” they said.

The ill-timed acquisition of Ernst & Young consulting business in the United States at the peak of the tech bubble in 2000 pushed Capgemini into a long period of underperformance from which it emerged last year through drastic restructuring.

With revenue of over $400 million euros, Nasdaq-listed Kanbay Inc. is headquartered in Chicago. It has offices in North America and India and employs 6,900 people worldwide, including 5,000 in India.