New deals help consulting giant break into U.S.
European consulting giant Cap Gemini has been trying to make a name for itself since the early 1990s, but it still faces some stiff competition.
Cap Gemini, which posted sales of nearly $5 billion last year, has attempted to make a name for itself on this side of the Atlantic since the early 1990s. However, it has been overshadowed by competitors such as Electronic Data Systems, Andersen Consulting and other domestic services giants.
Deals have come fast and furious in the past few weeks. Today the firm agreed to a joint venture with networking equipment leader Cisco to build a network design and consulting subsidiary. Last week, Cap Gemini sealed an $11 billion deal for Ernst & Young's consulting unit and its 18,000 employees.
In the wake of these pacts, Paris-based Cap Gemini may finally be close to establishing itself as a viable services player on U.S. shores.
But to do so, Cap Gemini needs to absorb 18,000 new employees from Ernst & Young and work on integrating other consulting deals into its fold. If the company isn?t successful, analysts say, Cap Gemini may continue to be the largest services firm you've never heard of.
"How do you bring a stodgy European company into the U.S. market? That is a challenge," said Stan Lepeak, an analyst with the Meta Group.
"KPMG has done it, but that's because they have a strong networking expertise. Cap Gemini has no networking or e-business expertise. They are also going to have to hold on to people when the (Ernst & Young) merger goes forward. That is key for them," he added.
It's not that Cap Gemini hasn't been trying. The European firm has been working hard for several years to expand its services business. Software makers Oracle and Siebel have been brought on board to drive customer relationship software, Microsoft has helped build systems for e-commerce and telecommunications expertise, and Mannesman has aided in establishing Web hosting partnerships.
Last week's deal with Ernst & Young gives Cap Gemini a veritable army of consultants that the firm will need to compete with the likes of EDS and IBM.
Analysts said the latest deals could be Cap Gemini's final shot at becoming a viable competitor on U.S. soil. A number of hurdles stand in the way of the company's success, and the staggering cost of absorbing Ernst & Young's consulting operation could sink the venture if new contracts don't materialize.
The deals are certainly a step in the right direction, and they could bring a new class of e-commerce related consulting to Cap Gemini, Lepeak said. The Cisco deal "is critical, because it brings a lot of attention and Cap Gemini gets to work with a company that (handles) e-business. Maybe that will rub off on them," he said.
Tom Rodenhauser, an analyst with ConsultingInfo.com, said the Ernst & Young deal is key. "It's one thing to team with Cisco and Oracle. That's common. But when you buy another services company you're dealing with a whole set of new challenges. It will be difficult.?
Another challenge for Cap Gemini is image. The company needs to "come up with the correct name and marketing scheme for this venture because the name Cap Gemini won't fly in the U.S.," said Rodenhauser. "Ernst & Young is known, but for accounting mainly."
Rodenhauser said that without a catchy name and marketing plan, the combined Cap Gemini-Ernst & Young venture "could be the biggest services company you never heard about and may remain that way."
The sheer volume of deals has not guaranteed the company a U.S. presence in the past, and some analysts see no reason why things will change.
"Cap Gemini tried to take on the U.S. market four or five years ago. For a while it looked like they were going to get it right. They made a number of acquisitions but failed to make what looked good on paper work in the real world," said Rodenhauser.
Other analysts are more optimistic. In a report published today, Morgan Stanley Dean Witter analyst William Farrell said the teaming of Cap Gemini and Ernst & Young looks great so far. "The two companies are complimentary in many ways and would be stronger together than apart, in our view," Farrell wrote.
If Cap Gemini can absorb its recent purchases--and quickly integrate new consultants into its ranks--the firm has all of the pieces in place to take on the established U.S. giants. "If they can bring (Ernst & Young) into the family and go to market with a plan, they could be going head-to-head with Andersen," said Rodenhauser.
"But on the other hand, this could be their third strike and they could be out of the picture in two years," he added.