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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:

For now, no one is commenting on the speculation -- and not everyone thinks Capgemini is a walking bull's-eye. "Who would want to take over Capgemini?" says Bob Djurdjevic, president of Annex Research in Phoenix. "When you acquire something, you acquire the problems, not just the benefits."

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). 

What has also become quite evident by now is that Fujitsu... needs to buy its way into it, and/or partner with others to do it.  

(An excerpt from Annex Bulletin 2004-16, 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:

"SEXIEST DEALS."  Capgemini has its bright spots. The U.S. market should start to pick up, thanks to a $3.5 billion outsourcing deal inked with Dallas-based energy company TXU (TXU ) in 2004, says Djurdjevic. He calls the 10-year pact the first "megadeal" in the U.S. won by a foreign-based IT services company, saying: "They have scored probably what is one of the sexiest deals in IT services."

Also looking up is Capgemini's unit for small and midsize businesses, Local Professional Services, which now represents 17% of revenues. Already Capgemini's most profitable, the division has strong growth prospects. Until recently, IT-services outfits have spent most of their energy going after big customers. The small-to-midsize field "is pretty rich," says Djurdjevic. "And nowhere is the opportunity greater than in Europe, which is their home turf."

On the order-book front, the news is also encouraging. As of June 30, Capgemini had $15.50 billion in booked orders, more than double what it had chalked up at this point in 2003.

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!

Bob Djurdjevic

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)

2003 Cap: Biggest Feather in Cap's Cap (Dec 2003); The 10-year Glitch (Mar 2003) 

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)

Or just click on and use appropriate  keywords.

Volume XX, Annex Newsflash 2004-18
October 4, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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