/Wipro’s Capco acquisition may face challenges due to revenue stagnancy, integration: analysts

Wipro’s Capco acquisition may face challenges due to revenue stagnancy, integration: analysts

Wipro’s acquisition of UK-based consulting firm Capco may have its own challenges owing to stagnant revenue of Capco and a possible delay in integration, analysts said.

“Successful cross-selling or integration of offerings will likely depend on the incentive structure promoting the same. Capco’s revenue stagnancy is of concern as it can be a further drag on the already low growth of

. Given its onsite (and )consulting heavy nature, the acquisition should weigh on IT services’ margins (by 110bps, proforma, excluding amortisation),” wrote Sudheer Guntupalli and Hardik Sangani of ICICI Securities in a report.

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While the Bengaluru-headquartered IT services company’s bold decision to acquire Capco for $ 1.45 billion, biggest so far, is expected to give a consulting edge over its peers; equity analysts express concerns about the price of the deal and the integration between two organisations.

“Wipro paid approximately 70-75% higher versus the previous transaction (FIS sold down 60% stake in Capco to a private equity firm in 2017 valuing the firm). The acquisition will consume 26% of cash if done entirely in cash,” wrote Prabhudas Lilladher in a report, adding that Capco has a very diversified presence, alluding to integration challenges.

ICICI has also downgraded the stock to sell post the acquisition said that keeping Capco as a separate entity should address “branding and culture conflict issues to an extent” and that successful integration of the companies will depend on the incentive structure for the teams. He added that Capco’s revenue stagnancy is of concern as well.

“Revenues of Capco have been largely stagnant for the previous three years. EBIT (operating) margins are hinted to be close to the onsite margin profile of Wipro. Including amortisation of the intangibles, Wipro expects its IT services margins to be diluted 2% in the first year with the acquisition turning EPS-accretive from third year,” wrote Guntupalli and Sangani, adding that: “Given its large size / lofty valuations, risk of integration challenges / future impairments (for example in case of HealthPlan Services) cannot be ruled out. This should remain an overhang on multiples of Wipro.”

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