Atos: outsourcer struggles to see through the cloud


Technology and growth are synonymous for most investors today. Legacy outsourcers are an exception to that rule. Their ability to move IT operations to low-cost economies once gave them an edge. Now customers are more interested in moving data to the cloud than jobs to Bengaluru.

France’s Atos has warned that results this year will be lower as that trend accelerates. Sales will go nowhere. Lower margins mean operating profits should shrink at least a tenth. No surprise, its share price fell up to 17 per cent.

Atos is facing the same problem as other erstwhile computing titans; what to do when competitive advantage evaporates. Chief executive Elie Girard plans a restructuring that will focus on digitisation, the cloud, security and decarbonisation. His dilemma is balancing the growing half of Atos’s existing business with shrinking legacy operations.

Chart showing IT services valuations, 2021-23. Enterprise value/forward earnings before interest, taxes, depreciation, and amortization and EPS (CAGR, %)

Scale looked like one solution. A scrapped attempt to buy DXC Technology of the US at the start of the year was followed by revelations of accounting discrepancies in April.

The mooted $10bn deal would have more than doubled the workforce to 250,000. But investors reacted badly to the prospect of a defensive transaction. Cost cutting only gets you so far when both businesses have similar problems.

Setbacks have pushed Atos shares to their lowest level since 2015, down 30 per cent this year. The current 7 times forward earnings multiple wallows near the bottom of the historical range. The contrast with local computing rival Capgemini could not be starker; its shares have gained 30 per cent this year and trade at 20 times forward earnings. 

Two charts. The first shows current and estimated sales for Atos and Capgemini, 2015 to 2025. Second chart shows Share prices rebased for Atos and Capgemini, 2019 - 2021

Capgemini’s €3.6bn acquisition of engineering consultancy Altran last year has erased fears that its legacy exposures will create a growth deficit. A tilt towards connected industry is expected to provide plenty of new opportunities. 

To have any chance of regaining favour Atos must forge a path back to growth that includes some risky diversification. Negligible net debts — the same as expected ebitda this year — mean it has the firepower for acquisitions. Otherwise a business skilled in reassigning workflows from incumbents may suffer the same fate itself.

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