Annex Newsflash 2005-15                          April 21, 2005

IT SERVICES

Updated 5/04/05, 12:15 PM PDT (adds "Revenues Up 16%'")

Analysis of Capgemini Unit's Sale to Accenture

Capgemini Jettisons Healthcare (in N.A.)

The $175 Million-Sale of Unprofitable Capgemini Unit to Boost Accenture's Position in Healthcare Industry

PHOENIX, Apr 21 – "If at first you don't succeed, try and try again," goes an old saw.   Or not.  "I think we've flogged this horse enough; let's get a new one," is an old saw antonym, usually attributed to president Dwight Eisenhower.  The Paris-based IT services firm went with presidential advice.  It sold its money-losing healthcare industry unit to Accenture for $175 million, roughly its annual revenue amount.

The market liked the news.  Shares of both Capgemini and Accenture were up in early trading this morning.

The completion of this deal will be the latest step in the execution of the 400 million euros ($536 million) asset disposal program that was announced last September.  Capgemini has now sold some 270 million euros ($362 million) of non-core assets since the plan was announced, and "there is not much left that is not directly strategic," according to Nicolas Dufourcq, the company's CFO who spoke from Paris at this morning's teleconference.

He said the selling price was good and represented one year of sales for the division, which had net 2004 sales of $171 million but was loss-making.  Capgemini has vowed to restore its loss-making North American operations to operational break-even in the second half of this year.

Upon the close of the sale, expected in the next two to three months, approximately 600 Capgemini professionals will transfer to Accenture.  Capgemini will retain its outsourcing contracts with healthcare clients in the U.S., as well as federal public sector health consulting capabilities, both of which are global strategic focus areas for Capgemini.  

“We are strengthening our operations in North America by resizing and refocusing our project and consulting business as a result of this transaction, and will be in position to invest in key strategic areas," said Pierre Danon, Capgemini's COO and executive chairman of North America.  Details of the North American recovery plan will be disclosed on May 4 as part of the 2005 first quarter consolidated revenues announcement.” 

"Our Health Care consulting practice in North America was a well-run business with top-notch people, and we wish them the best as they join Accenture," said Paul Hermelin, Capgemini's CEO, in a statement. "The fragmented, stand-alone nature of the U.S. private health provider market provided fewer synergies for the national public health care systems in Europe, where we continue to be a market leader around high-growth areas such as electronic health records."

As for Accenture, its already strong position in the healthcare industry will receive a shot in the arm from this transaction (see "Roaring Ahead," Apr 2005).  Using the economies of scale of a larger competitor, and its already significant investments in developing reusable assets in the healthcare sector, Accenture has a chance to do what Capgemini has not been able to - make the business profitable.  And that's why the market is applauding both stocks this morning.

North America: A "Super Asset"

PHOENIX, Apr 22 - One day after announcing the sale of its North American healthcare unit to Accenture, Capgemini scored another win in North America, this time in Ontario, Canada.  Capgemini was selected to implement a $25 million state-of-the art pilot program to provide 25,000 "smart meters" to selected communities across Canada's province of Ontario in May and June 2005.  

Ontario's is the first major deployment of this new technology in North America.  IBM is running another "smart meter" pilot in Italy, the world's first such effort, but Capgemini beat out Big Blue to win the Ontario project.

"Smart meters" are a advanced, wireless technology that accurately measures how much electricity is used and when.  They are a key technology for "peak management," which provides the business case (justification) for their implementation.  Smart metering technologies also provide advanced billing capabilities, outage notification, and can link meters to other conservation and electricity demand management programs.

So far, Ontario and California legislatures are the only ones in North America that have mandated the "smart meter" tests and deployment, according to Chell Smith, the head of Capgemini North America.   But Capgemini executives are confident their pioneering know-how will become a reusable asset that can be sold to other utility companies around the U.S. and world.

"We have a pipeline of great clients behind it," extolled Smith in this morning's Capgemini teleconference with consultants and analysts.

The energy sector is one of the strategic business areas upon which the recovery of Capgemini's North American operations is being built (also see "Capgemini: Texas-size Home Run," May 2004).  Smith and the company's new COO, Pierre Dannon, who has been spending two weeks a month in the U.S., are expected to announce on May 4 the details of the "Booster" program, the code name for the restructuring.

"Revival of North America isn't going to be a day on the beach," said Dannon during the teleconference.  The "Booster" will incorporate a number of radical changes.  "Now that the patient (Cap's North American ops) is getting out of the crisis, and is ready to take the remedy, we will apply a strong remedy," Dannon added.

"North America is and should be a 'super asset' for Capgemini," he summed it up.

Capgemini Posts 16% Revenue Surge

PHOENIX, May 4 - Capgemini posted a 16% revenue growth to €1.7 ($2.2 billion) in its first quarter of 2005 (up 19% in constant currency), surpassing stock market expectations.  The company also unveiled an extensive restructuring plan for its money-losing North American operation.  Its stock jumped about 3.7% on the news, and then eased off to finish the day with a 1.7% gain.

New contract sales were €1.4 billion ($1.87 billion), down from  €1.6 billion ($2.13 billion) a year ago, mostly due to lower outsourcing signings.  The new bookings of consulting and professional services, however, which account for more than 80% of the total, were flat at €1.16 billion ($1.5 billion).  They have shown a remarkable consistency in the last eight quarters, as you can see from the above chart.

Europe was not only Capgemini's biggest region but also the best in the first quarter.  The revenues from the Old Continent jumped by over 19% as reported, and by over 22% on an organic basis.  The biggest increases were in the U.K. and Ireland (up 65%) and Central Europe (up 18%).  The Nordic countries also recorded a strong (15%) growth.

"Europe is really booming," boomed Pierre Danon, the company's COO, in a teleconference that followed the financial release. "We're very happy with that we're seeing in Europe."

Capgemini's ailing North American operations, whose leadership Danon has just taken over, recorded a 4% revenue growth (up 8% on an organic basis).  Its restructuring plan, code-named "Booster", would cost €102 million in 2005 and €25 million euros in 2006, the company said.  In the long run, however, Capgemini is hoping it would benefit from €125 million in annualized savings.

The "Booster" plan entails a refocusing of the Consulting and Technology services businesses around five regions, a 30% reduction in subcontractors and a 30% cut in support and administrative staff, and a 45% reduction in office space.  

Furthermore, 50 vice presidents (25% of the total) and 80 senior managers (10% of the total) have been already cut to-date.  Danon said the company expects to be already about 75% done with its restructuring by the end of the first half of 2005.

Capgemini said it would also refocus its sales activities.  Today, it is selling over 300 different services in 4 geographies, 8 industry sectors and 15 service lines in the U.S. alone.   By the end of the year, the North American operation will focus on around 30 services across 5 geographies (4 U.S. and Canada).

As a result of the "Booster" plan, Capgemini has vowed to restore its loss-making North American operations to operational break-even in the second half of this year.

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2005 IT: Capgemini Jettisons Healthcare in N.A. (Apr 2005); HP: From India to Poland (Apr 2005); IBM: Slammed and Dunked (Apr 2005); Accenture: Roaring Ahead (Apr 2005);  Fujitsu Unveils New Servers (Mar 2005);  EDS Executive Suite; HP's New CEO (Mar 2005);  An iSeries Revival (Mar 2005);  EDS Booster Club Fees Rise (Mar 2005);  An Upside-Down View (Mar 2005);   The Worst of Both Worlds (Mar 2005);   Octathlon 2005: Accenture Wins (Mar 2005);  IBM Global Services: Smaller, Shorter - Better? (Mar 2005);  IBM 5-yr Forecast: Quality over Quantity (Mar 2005); Rumor Lifts EDS', Fujitsu's Shares (Mar 2005); Capgemini: Turning the Corner (Feb 2005);  IBM Servers to Grow Again (Feb 2005);  Carly's Fickle Fans (Feb 2005);  CSC: Gearing Down on Purpose (Feb 2005);  EDS: Grossly Overpriced Stock (Feb 2005);  IBM Historical Update: 2004 Shot in the Arm (Feb 2005); New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005)

2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004);  IBM Server Renaissance (Nov 2004);  HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004);  To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 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); 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)

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Volume XXI, Annex Newsflash 2005-15
April 21, 2005

Bob Djurdjevic, Editor
(c) Copyright 2005 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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