Sunday, 1 July 2007

Infosys lapping up Capgemini: will politics allow it.

Ever since the rumours of Indian IT service giant Infy taking over Europe's largest IT serices & consulting company Capgmini cropped up in the media last Friday, the shares of Capgemini on european bourses have gone up substaintially whereas Infy's shares hardly moved that shows how much European shareholders expect to gain from this deal, whereas Infy shareholders hardly see any short-term gain out of this deal.
Shareholders are mostly the creatures who see just the short term gains. They want to see how much money they can make from now upto a year or two. They hardly see if the deal is a strategic fit or it's going to be a good one for long-term or it's good for social fabric of the area where the company operates.

Definitely if eventually Infy does take over Capgemini, the first thing shareholders of CG would expect is to cut the cost. Since the operating margin of CG is hardly 5.5% whereas that of Infy's is above 25%. So shareholders of CG would expect this margin going up significantly up. For since cost cutting is the most important step management can take to improve margins in service companies. And service companies being people intensive, they would cut down employees in Europe and such other high cost western markets and hire more and more in India and other low-cost markets.
This would surely create a huge political and workers-union tension in Europe, where already unemployment rates are high.
And problem Infosy management would face is that of retaining consulting unit employees. Main reason why Infy wants to buy this is to make easy and fast inroads into lucrative consulting pie which have so far proved to be tough nut to crack for all Indian players. This business is mostly dependant on how good people you have in your team. So if Infy can not culturally merge CG than all important people would leave CG and making deal meaningless for Infy. So Infy have to leave core consulting business of intact in the way it functions and have to give full freedom to operates then only it can reap the benifit of deal in the long term.

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