Overview:
On July 22, 2018, Atos, a large France-based IT services firm, entered into an agreement to acquire Syntel, a technology and knowledge process services provider, for c.$3.6bn, representing a value $41 per share.
Headquartered in Michigan, Syntel was founded in 1980 as a staff augmentation company and later evolved into a full service IT services provider. The company now offers product engineering, testing, application modernization, IT operations, and digital transformation services. The company caters to more than 50 clients, with the top three – American Express, State Street Bank, and FedEx Corp – contributing over 40% of the revenues. It is focused on the BFSI sector, which contributes 60% of the revenues and has a large presence in US, which accounts for almost 90% of its revenues.
Valuation:
The valuation of $3.6bn represents 3.7x LTM revenue and 13.5x LTM EBITDA of Syntel. This is in line with the market valuation of Syntel – it trades at 3.6x revenue and 13.1x EBITDA – and represents a premium of 4.8% on Syntel’s closing share price of $39.1 on July 20. Currently, the large cap IT services companies (over $1bn market capitalization) are trading at an average of 2.9x sales and 16.4x EBITDA.
However, considering that the company has seen a decline in its revenues for past two fiscal years, the valuation seems quite generous. To be fair, the company now seems to be getting back to the growth path.
The higher valuation, then, can be attributed to the high margins – Syntel has healthy EBITDA margins of over 27%, compared to 12.6% for Atos and an average of 18% for large cap IT services firms – and the synergies that have been estimated by Atos. The company expects $120m in annual cost synergies by reducing SG&A costs and $250m revenue synergies by exploiting cross-selling opportunities by 2021.
Transaction rationale:
The deal is expected to be immediately accretive to Atos, with double digit accretion by 2019.
The transaction will significantly expand Atos’ presence in US, an important market which currently contributes c.17% to the company’s revenue. Also, it will greatly enhance its financial services vertical, which currently contributes c.18% of the revenues. It will acquire marquee customers such as American Express and State Street Bank, which have a long history of association with Syntel.
Syntel’s strong offshore delivery – 18k of its 23k employees are based in India – will help to improve Atos’ operating margins as well.
Atos has a history of acquiring and integrating large companies – Xerox (US IT), Bull, Siemens (IT solutions) to name a few. Syntel seems to have all the attributes of being another jewel in this crown of acquisitions.