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If Cap Gemini Ernst & Young goes ahead with its proposed takeover of French systems integrator Transiciel, it would go against most conventional thinking in the IT services sector. CGEY needs to invest in longer-term benefits, rather than just improving short-term earnings.

Paul Hermelin, CGEY's chief executive said last week that he is still considering whether to pursue the takeover of Boulogne-based Transiciel, and is cautious about the company's desire to be merged into CGEY's Sogeti bodyshopping business, of which it was formerly a part.

On the positive side, if CGEY merged with Transiciel, it would consolidate its position as the largest services company in its domestic market, with international rivals IBM Global Services and EDS attempting to deepen their relationships with France's largest accounts. It would also go a small way towards improving the French IT services market's current overcapacity problem, and Transiciel's operating profit margin of 7.7% is significantly higher than CGEY's, which was 2.7% in the first half of the year.

But bringing Transiciel into the group would fail to address CGEY's two major strategic goals: to grow its outsourcing business, and to develop its offshore delivery capabilities. Companies such as CGEY need to counter the current depressed spending on discretionary consulting and integration projects by building up recurring revenue streams from outsourcing. This is not an area of great strength for Transiciel, which makes about 30% of its sales from outsourcing, the same amount as CGEY.

Nearly all top-tier IT services providers are building up their offshore delivery capabilities in order to compete against low cost Indian companies in areas such as applications management and maintenance. Transiciel specializes in both areas, but cannot offer clients a low cost delivery option of its own.

Investment analysts at JP Morgan point out that CGEY has only 2.5% of its global workforce based in low-cost markets such as India and the Far East, compared to figures in excess of 5% at Accenture and IBM Global Services, and 70% at Indian software services specialists such as Wipro Technologies and Infosys Technologies. CGEY should be looking to invest in companies that can grow its capabilities in these areas, rather than pursuing local rivals for short-term earnings benefits.

Source: Computerwire/Datamonitor

Recommended research: Reuters Business Insight, "The IT Services Outlook" (RBTC0059)

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