Introduction:
Wipro has recently acquired a London based IT Company named ‘Capco’ for total consideration of Rs. $1.5 billion. The company has also welcomed the new CEO Thierry Delaporte in July 2020. He is from consulting background, and was Chief Operating Officer (COO) of Capgemini for 2 years.
Despite the good news of acquisition, stock has plunged by 4.5% on Friday.
Scenario behind Acquisition of Capco:
- Capco, is a London based Technology Consulting company with a revenue of $700 million. Whereas, the revenue of the acquirer company, Wipro is $8.4 billion.
- The reason behind this acquisition by Wipro is due to the saturation of growth in IT industry. Due to heavy competition in the Industry, company has less scope of organic growth and hence it is opting the option of inorganic growth by means of acquisition and other modes. Hence, by this acquisition of Capco, Wipro has followed the path of inorganic growth.
- The deal ill be funded by equity and debt.
Why is stock price of Wipro Ltd falling down?
1) Operating Profit Margin & Revenue:
- Firstly, the market is concerned about the Operating Profit Margin (OPM) of Capco, which ranges between 11%-14%. On the other hand, Wipro’s OPM hovers between 18%-21%.
- There is huge difference between the revenue of Capco and the Wipro. Revenue of Capco does not even make 10% of the Revenue of Wipro.
2) Dilution of OPM of Wipro:
- Market is believing that the low OPM of Capco, might affect the Operating Profit margin of Wipro. Possibly, OPM of Wipro may dilute by 0.5%-1%.
- As of now, market participants are wary of the profitability and revenues of Capco being on the lower side despite being a consulting firm.
3) Integration of the Companies:
- Another concern of the market is that: Whether there will be smooth Integration of the two companies.
- Normally, it is observed that there are certain complexities regarding work culture, employee turnover, exit or current clients, etc., in the case of acquired company.
Valuation:
- The long-term PE of Wipro is between 16x-17x, and Wipro is currently trading at premium valuation with PE ratio of 24x.
Conclusion:
The reason for fall in the stock price of Wipro is a short-term factor as the current management of the company is concentrating primarily on the growth-organic as well as inorganic. This acquisition of Capco also portrays aggressiveness of the firm's inclination towards growth.
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