Cap Gemini to acquire Ernst & Young Consulting

Cap Gemini SA has agreed to terms for the acquisition of the Ernst & Young LLP. Under the agreement, the IT outsourcing company will acquire most of Ernst & Young's consulting activities, with an annual turnover of 3.5 billion euros in 1999, and 18,000 employees.

Partners in Ernst & Young (and those of its audit branch) will between them receive 43.5 million new Cap Gemini shares and 375 million euros in cash. With Cap Gemini's share price at around 250 euros, the whole transaction is worth some 11.2 billion euros (US$10.9 billion).

The deal has yet to be put to a final vote. In each country, a majority of three quarters of the partners will be required. According to Cap Gemini, the votes will take place in the next few weeks, and with the final results announced next month. Partners in seven countries, which between them generate 88 percent of Ernst & Young's revenues, have already agreed in principle to the acquisition: they are the US, Canada, UK, France, Germany, Italy and Spain.

For Cap Gemini, the advantages of absorbing Ernst & Young Consulting are significant.

Geographically, the move will strengthen its US operation, where it makes just 13 percent of its revenue, and move it into Germany, where it has no presence. In contrast, 65 percent of Ernst & Young's revenue comes from the US, and 7 per cent from Germany. The combined business will generate 36 percent of its revenue in North America, and 5 percent in Germany.

Viewed by market sector, the deal also has benefits, especially in the three markets where both Cap Gemini and Ernst & Young are strong: finance, telecom and industry. These three sectors will represent almost half of the new Cap Gemini's turnover.

Finally, Cap Gemini will gain some important customers: Boeing, The Coca-Cola, Ford Motor, Glaxowellcome, AT&T, Merrill Lynch & Co and Peugeot.

The acquisition will have no effect on operating margins (before taking into account the cost of the acquisition and economies of scale), because Ernst & Young's profitability is comparable to that of Cap Gemini, at around 11 per cent, said Paul Hermelin, CEO of Cap Gemini France and Southern Europe, at a press conference here yesterday.

"There will probably be no hemorrhaging, and staff losses could even fall, given the ambition of this acquisition," said Phil Laskawy, chairman of Ernst & Young International.

Ernst & Young will continue to operate its audit division under the same name, but Cap Gemini will be allowed to use the brand for the consulting activities for four years. The partners in Ernst & Young's audit division can afford to be generous: they will receive a fortune in Cap Gemini shares under the deal.

"A new brand will be created including the reference to Ernst & Young," explains Hermelin.

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