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Corporate Finance

Margaux Wagnner

Annita KM

Prashanth Ramachandran

Cheng Peng

María Villuendas

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SUMMARY

I/ Major financial developments and company performance …………………………….pg 2

II/ Growth and changes ……………………………………………………………………………………… pg 5

III/ Leverage - Capital structure ……………………………………………………………………………pg 6

IV/ Cost of capital ………………………………………………………………………………………………. pg 8

V/ Firm market value, stock price performance vs. main stock market index ………pg 14

VI/ Ownership structure – CEO duality / non-duality…………………………………………….pg 16

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INTRODUCTION

Cap Gemini S.A was founded in 1967 by Serge Kampf. Is one of the world's foremost

providers of consulting, technology and outsourcing services with more than 140,000

employees in over 40 countries. Is a French multinational corporation headquartered in Paris,

France.

I/ Major financial developments and company performance

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The Financial Services of Capgemini accounts to 20% of the revenue generated every

year. Capgemini financial service the Group is responsible for streamlining applications and

infrastructures within financial institutions and has also contributed various innovations –

particularly in terms of mobility, intelligent data management and adapting to new digital

means of interacting with end-users.

The major financial developments indicating the performance of Capgemini for the period of

2009-13 are as follows:

On September 17, 2009, Capgemini Australia announced the signature of an

agreement to acquire the Australian software testing company Nu Solutions. Thanks to

this acquisition, Capgemini is now the leader in the Australian managed testing

services market, has enriched its client portfolio in the “financial services” sector and

has strengthened its presence in the Australian public sector

Following five years of successful service and program delivery, Capgemini Group

strengthened its partnership with its main client, Her Majesty’s Revenue & Customs

(HMRC), the UK’s tax authority, which undertook to channel its main IT expenditure

through the Aspire contract in return for a reduction in its IT running costs

Capgemini announced the launch of five global service offerings in highly promising

market segments, aimed at increasing the order book by €800 million in 2010

Cap Gemini increased its share capital as part of an international share ownership plan

reserved for employees and concerning 6 million new shares, ranking for dividends

from January 1, 2009 and issued at a price of €27.58. These shares were subscribed for

a total amount of €165,480 thousand.

Capgemini agreed a three-year outsourcing contract worth around 120 million euros

with EDF Energy UK during mid 2010

BAA, the airport authority that operates six airports in the United Kingdom (including

Heathrow), has agreed a five-year contract worth around 120 million with Capgemini

during the year 2010

The Metropolitan Police Service (MPS), the largest police service operating in Greater

London, extended its contract with Capgemini UK plc, its main information and

communications technology partner, until December 2015.

Royal Mail Group Limited, the national postal service of the United Kingdom, signed a

six-year “cloud computing” contract for the management of its various IT services

during the year 2010

Capgemini announced the signature of an agreement with the shareholders of CPM

Braxis enabling it to acquire a 56.06% interest in the share capital of this company.

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Capgemini Outsourcing Services S.A.S. announced the signature of a long-term

contract with Nokia Siemens Networks (NSN), a leading global provider of

telecommunication services, for the management of its entire customer order system

Capgemini announced the acquisition in Germany of CS Consulting, one of the leading

providers of consulting services in the banking and insurance sector during 2010

Major acquisitions for Capgemini during the year 2011 included BICG Consulting

group(USA), AIVE Group(Italy), Praxis Technology(Beijing), Artesys and

Avantias(France)

Capgemini signed a three-year contract with BC Hydro, the third largest electric utility

in Canada. This contract, worth CAD 63 million (approximately €48 million) forms part

of BC Hydro’s Smart Metering & Infrastructure program

Capgemini extended its BPO contract with International Paper, a global leader in the

paper and packaging sector. This contract, worth €42 million, covers the existing scope

of Finance and Accounting (F&A) services already provided to International Paper

Capgemini launched a five-year €500 million bond issue paying gross annual interest of

5.25%. The transaction was settled on November 29, 2011

2012 was primarily marked Serge Kampf’s decision (announced to the Board of

Directors’ Meeting of April 4, 2012) not to go to the end of his term of office as he

expressly reserved the right when his term of office was renewed. Serge Kampf,

Founder, Chairman and inspiration of the group for 45 years passes the torch to Paul

Hermelin. The Board of Directors accepted Serge Kampf's proposal to reunify the

functions of Chairman and Chief Executive Officer (separate since 2002) and appoint

Paul Hermelin as Chairman and Chief Executive Officer from the day he ceased to

occupy these functions

Capgemini North America signed an IT infrastructure services agreement in March,12

with the Department of Information Resources (DIR) of the State of Texas. This six-

year, €96 million agreement is one of the largest IT infrastructure services contracts

todate for Capgemini in North America.

Capgemini signed an outsourcing contract in March, 12 with Rolls-Royce, a world-

leading provider of power systems and services for use on land, at sea and in the air

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II/ Growth and changes in Capgemini group for the past 5 years

1. Key facts:

The following table depicts some consolidated (from all the subsidiaries) financial data of

the group1.

From this we can calculate the following:

Return on equity=

Return on asset=

Capgemini trades in the Euronext Paris and their share prices fluctuate during one

fiscal year. To calculate the Dividend yield for the past years, we will make an average between

the highest and the lowest share prices/ year.

1 The data can be found from the company’s financial reports.

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Dividend yield=

2. What does it mean for the group:

The company is service oriented and the above data are a combined for all business

activities and geographic segments.

We can see that the Technology sector is the one bringing the more revenue to the

company, followed by the Outsourcing. Most sectors have remained steady for the period, but

the Consulting one is actually decreasing in terms of profitability.

Breakdown of revenues by geographic segments

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About the segments, France alone is the most profitable segment (headquarters of the

company) and the Asia- Pacific/ Latin America segment has reported strong growth.

The increase of assets over the years is mostly due to the expansion of the group; for

instance, in 2011 alone, they have fully acquired (100%) many IT services providers (from Italy,

Germany, France) and bought shares from various companies around the world. The company

has relied a lot on inorganic growth for the past 5 years.

Overall, the company’s profitability has been increasing, except for a decline in 2013,

for which the group’s CFO reported that it was due to innovation activities (organic growth)

and the Euro fluctuations; the 3 previous quarters of 2014 have actually been very positive for

the group.

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III/ Leverage - Capital structure

Registered capital and stock market.

Breakdown of Cap Gemini December 31, 2009 Breakdown of Cap Gemini December 31, 2010

Breakdown of Cap Gemini December 31, 2011 Breakdown of Cap Gemini December 31, 2012

52%

31%

8%

8% 1%

Non- french institutional shareholders

French Institutional shareholders

Group directors & Employees

Individuals shareholders

Treasury stock

56% 27%

7%

9% 1%

Non- french institutional shareholders

French Institutional shareholders

Group directors & Employees

Individuals shareholders

Treasury stock

53%

30%

7%

9% 1%

Non- french institutional shareholders

French Institutional shareholders

Group directors & Employees

Individuals shareholders

Treasury stock

54%

27%

10%

7% 2%

Non- french institutional shareholders

French Institutional shareholders

Group directors & Employees

Individuals shareholders

Treasury stock

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Breakdown of Cap Gemini December 31, 2013

Through these graphs, we can see the evolution of the capital structure of the firm.

Indeed, the major registered capital come from non-French institutional shareholders follow

by the French institutional shareholders. The treasury stock segment is always the lowest one

concerning the Cap Gemini’s breakdown.

Cap Gemini stays close to its shareholders and developed a strength communication

strategy to meet its individual shareholders expectations. Regularly, Cap Gemini attend to do

shareholder meetings in order to present its businesses, strategy and financial results.

In fact, the 46th General Meeting of the Shareholders of Cap Gemini SA was held on

May 7, 2014 at the Pavillon d’Armenonville in Paris. All the resolutions were adopted, notably

for say on pay with 96.83% of the votes cast. The shareholders also appointed new directors:

“-Xavier Musca, Deputy Chief Executive Officer of Crédit Agricole SA and a Director of Banco

Espirito Santo, with 97.31% of the total votes.

-Caroline Watteeuw-Carlisle, retired, previously Global Chief Technology Officer and Senior Vice

President of Business Information Solutions, PEPSICO, with 99.37% of the total votes.

-Anne Bouverot, Chief Executive Officer and member of the Board of Directors of GSM

Association, by 98.87% of the total votes.”

As you can see in the following graph, the Cap Gemini Debt to Equity ratio went

through different period. The leverage ratio indicating the relative proportion of shareholders'

equity and debt used to finance a company's assets. We can see the higher ratio was in 2012.

A high debt to equity ratio usually means that Cap Gemini has been aggressive in financing

growth with debt.

In 2014, the ratio debt to equity was approximately of 0.21% that means a lower risk, because

debt holders have less claims on the company's assets.

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IV/ Cost of capital

As we can see from the consolidated financial statements of 2009-2013(appendix 1),

Cap Gemini use a combination of debt and equity to finance their businesses. As show in 2013

annual report, the firm has €10.1 billion revenues, 8.5% operating margin and €442 million

profit, up by 25% compared with 2012. Given that performance was better than forecasted,

the dividend proposed for financial year 2013, at the General Meeting of Shareholders held on

May 7, 2014, is €1.10 per share (appendix 2). This is 10% higher than the 2012 dividend and

corresponds to a 40% pay-out rate. Historically, the Cap Gemini dividend policy was to

distribute 33% of consolidated profit. The pay-out rate since 2009 has far exceeded this

percentage.

Firms typically finance their investment proposals with a combination of equity capital and

debt capital, and both shareholders and debt holders require a return from their contribution

to the financing of the proposal. People invest Cap Gemini based on its outstanding profits, in

other words, they believe Cap Gemini will bring them right project which will gain more

dividends.

Usually, we can use cost of capital as a discount rate of evaluating an investment, and

maintaining the price of firm’s stock. Weighted average cost of capital (WACC), is a weighted-

computational method of analyzing the cost of capital based on the whole capital structure of

a firm. The result of WACC is the rate a firm use to monitor the application of the current

assets because it presents the return the firm MUST get. Since Gap Gemini has both debt and

equity, we have to calculate both the cost of debt and cost and cost of equity before we

analyze the cost of capital:

a) Cost of debt

The cost of debt is merely the interest rate paid by the company on such debt.

However, since interest expense is tax-deductible, the after-tax cost of debt is calculated as:

After-tax cost of debt = Interest rate of debt（1-corporate tax rate）

According to the statement of cash flow in 2013 and Accounts and notes payable sheet

(appendix 3),

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Interest paid = 56,000,000

Accounts and Notes payable = 2,293,000,000

The interest rate for the period:

Interest paid / Accounts and notes payable = 56,000,000 / 2,2293,000,000 = 2,44%

So, the final number is :

After-tax cost of debt = 2.44%(1-33.3%) = 1.62%

N.B. The corporate tax rate of French company is 33.3 (see appendix7)

b) Cost of equity

The cost of equity is more complicated, since the rate of return demanded by equity

investors is not as clearly defined as it is by lenders. It can be estimated using �Capital Asset

Pricing Model (CAPM).

However, there is a more easy way to calculate it:

Cost of equity = (Dividends per share next year / Current market value of stock) + growth

rate of dividends

According to the appendix 4, we will find out that:

Dividends per share next year= 1,1

Since we have to use the current market value of stock, we could choose the number of March

14, 2013 as an example(appendix 6)

Current market value of stock = 55.281

Growth rate of dividends=(dividends per share for 2014-dividends per share for

2013)/dividend per share for 2013,which is 0 (appendix 5)

Cost of equity=(1,1/55.281)%

=1.98%

c) WACC estimation

1. Estimate the firm’s relative proportions of debt (D) and equity (E) financing:

(See appendix 1&2)

D+E=10176 D/E+D= 5685/10176= 55.86% E/E+D=4491/10176=44.13%

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2. Use all the numbers above to calculate the final ratio:

WACC = Weighted Average Cost of Capital

Dk = cost of Debt Ek = cost of Equity

Tc= corporate tax rate

D = Debt E = Equity

Then, the final number is :

WACC= 1.62%*44.13% +1.98%*55.86%

=1.8%

Then, we use the same method to calculate the WACC of 2009-2012, here are the numbers

needed during calculation.

In M € 2009 2010 2011 2012

Interest paid (26) (32) (53) (66)

Accounts and notes payable

2026 2305 2340 2335

Corporate tax rate

33.3 33.3 33.3 33.3

Dividends per

share （in

euro）

0.8 1 1 1

Current market value(on March in euro )

36.02 40.798 33.398 37.664

Equity 4213 4307 4283 4518

Debt 5000 5461 6731 6138

Equity + Debt 9213 9768 11014 10656

We can easily calculate the final numbers:

2009 2010 2011 2012

Cost of debt 0.86% 0.93% 1.51% 1.89%

Cost of equity 27.78% 27.45% 2.99% 2.65%

WACC 13.17% 12.62% 2.08% 2.21%

When looking at the WACC figures for the period if 2009-14, it can be seen that the

capital has been stable for the period of 2009-10, however for the period of 2011-2013 the

capital has decreased by a considerable margin This decrease in capital can be accounted for

the rapid decrease in the cost of equity for the mentioned period.

Since the cost of capital represents a hurdle rate that a company must overcome

before it can generate value, it is extensively used in the capital budgeting process to

determine whether the company should proceed with a project. Cap Gemini strive to attain

the optimal financing mix, based on the cost of capital for various funding sources. But, debt

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financing has the advantage of being more tax-efficient than equity financing, since interest

expenses are tax-deductible and dividends on common shares have to be paid with after-tax

dollars. However, too much debt can result in dangerously high leverage, resulting in higher

interest rates sought by lenders to offset the higher default risk.

V/ Firm market value, stock price performance vs. main stock market

index

a) Firm market value

The market value of a corporation is the value of the firm based on the price that

shareholders are willing to pay for stock in the company in public markets. Here we have a

graph (1) representing the stock price of the company in 2014.

GRAPHIC 1 (Capgemini’s stock prices 2014)

Bloomberg.com

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To know the firm’s market value we have to measure the market capitalization that it

represent the amount of money it would cost if someone buy every single share of stock

Capgemini had issued at the current market price.

In the graph we see that Capgemini has 158,000,000.59 shares of stock outstanding and the

stock price is $58.4. The market capitalization is: Nº of shares outstanding x stock price=

158,000,000.59 x 58.4= $ 9,227,200,034.45. That figure allows investors to understand the

relative price of Capgemini versus another.

GRAPHIC 2 (Stock prices 2011-2014)

We know that a share is a security issued by a corporation that represents the value

of one of the equal fractions that its capital is divided. The stock price will rises and fall

depending on how much investors pay for a share. They will pay money only if they believe

that the company will succeed. If company is successful, the stock price is going to increase.

In that second graphic we have the evolution of the stock price between 2011 and 2014. In

2005 the stock price was $26,210 and it has increased to $58,98 in 2014. So that means that as

the company is getting successful there are more and more investors that buy its shares, so

the price increases.

The volume represents the number of shares or contracts traded in a security or an entire

market during a given period of time. So we can see that the period were more shares have

been traded is in September 2013 and December 2012.

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b) stock price performance vs. main stock market index

The stock market index is a statistical tool used to study the evolution of stock prices

in the stock market. It reflects the price evolution of a group of companies that are

representative of the market. In summary, the aim is to reflect the performance of all stocks

listed on the stock taken together like a single unit. So we are going to compare we will analyze

the evolution of the valuation of Capgemini with respect to the CAC 40.

In the graph we see that the evolution of Capgemini in percentage terms is higher

than the CAC 40. That means that the valuation of the company has evolved better than the

rest of the French market, above all between 03/03/2006 to 03/01/2008. In 2005 Capgemini

and the CAC 40 has evolved in the same percentages

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VI/ Ownership structure – CEO duality / non-duality

As we can see in this previous graph, two different person, Mr Paul Hermelin and Mr

Serge Kampf, represents the CEO and chairman of the boards. Cap Gemini has a non-duality

ownership structure.

Board of Directors

Chairman : Serge Kampf Board of directors is the collegial body

representing all shareholders collectively

Group executive commitee

The GEC is the main management body of the firm

Group management board

The GMB acts as a sounding board to enhance and support the group

strategic innitiatives

Chief Excutive Officer

Paul Hermelin

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Appendix 1

Consolidated statement of financial position

Source: annual report 2012

Appendix 2

Consolidated statement of financial position

Source: annual report 2013

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Appendix 3

Consolidated statement of cash flow 2011-2013 (million euros)

Appendix 4

Consolidated financial statement

Source: annual report 2013

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Appendix 5

Appendix 6

Share price and trading volume

Source: annual report 2013

Appendix 7

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SOURCES

- http://www.capgemini.com/investor/financial-statements

- http://www.capgemini.com/investor/shareholder-letters

- http://www.tradingeconomics.com/france/corporate-tax-rate

- http://ieconomics.com/beta?ref=tradingeconomics.com

- http://www.tradingeconomics.com/france/corporate-tax-rate

- http://investors.morningstar.com/ownership/shareholders-

major.html?t=XFRA:CGM&region=DEU&culture=en-us

- http://www.big4.com/capgemini/capgemini-employee-shareholding-plan-a-

success-our-math-shows-why-449/

- http://fr.slideshare.net/pimdevogel/2010aug-capgemini-group-presentation

- http://www.capgemini.com/financial-publications

- http://www.capgemini.com/investor/financial-events

- http://www.capgemini.com/resource-file-

access/resource/pdf/h1_2014_results_analysts_presentation.pdf