×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

PE exit, low profitability may put BPOs on selling block

PE exit, low profitability may put BPOs on selling block
Comment E-mail Print Share
First Published: Thu, Sep 16 2010. 11 42 PM IST
Updated: Thu, Sep 16 2010. 11 42 PM IST
Mumbai/New Delhi: Reports that Genpact Ltd may be up for sale reflect a stark new reality for those business process outsourcing (BPO) companies that are not part of a larger information technology (IT) business.
Cognizant Technology Solutions Ltd is looking to buy Genpact, The Financial Express reported on Wednesday. The report may or may not be true, but it didn’t come as a surprise to to analysts who say the era of stand-alone back office services firms may be coming to an end.
Also See Facing the Heat (PDF)
On Thursday, one Genpact employee told Mint that CEO Pramod Bhasin had sent an email denying that the firm was being sold to Cognizant. Mint couldn’t independently confirm this.
When contacted, Bhasin said that as a matter of policy, Genpact does not comment on rumours or speculation.
In a 15 September research note, Deutsche Bank analysts Tim Fox and Devin Cargo cited remarks made by Bob Pryor, executive vice-president for sales and marketing at Genpact, at the Deutsche Bank Technology Conference in San Francisco.
“Pryor commented that while the strategic rationale for a convergence of ITO (IT outsourcing) and BPO is theoretically attractive, he simply has not seen it in practice,” they wrote. “With no apparent catalysts to make a large deal a reality in the near term, we see this speculation as unfounded and not a compelling strategic fit for the most frequently mentioned potential suitors.”
Still, a combination of factors including a desire among their private equity investors to cash out while market conditions are good, and the continued pressure on profitability may see more pure-play BPO firms coming on the block, say analysts.
“Lots of private equity (PE) players, who had reached the end of their planned investment horizon nearly two years ago, were out in the market looking to exit when the economy slowed down,” said Amit Singh, executive director and head of technology group, and co-head, BPO (business process outsourcing) group, at investment bank, Avendus Capital Pvt. Ltd. “Now that the market conditions are improving, those players are again looking at valuations and exit options.”
A senior executive with a back-office services firm who did not want to be identified said that several companies, including Cognizant and CapGemini, have been looking to acquire BPOs for some time.
Late on Wednesday, Bloomberg cited analyst Karl Keirstead of New York-based Kaufman Brothers, which tracks Cognizant, as saying the deal was unlikely as it may not be looking at an acquisition of the size of $4-5 billion (Rs 18,520-23,150 crore).
On the same day, at the Deutsche Bank Technology Conference, Cognizant chief operating officer Gordon Coburn told analysts that his firm was not currently looking at any large deals, but at smaller acquisitions. Genpact, listed on New York Stock Exchange, has a market capitalization of $3.7 billion.
“Cognizant has been looking at every possible BPO firm for an acquisition for a year,” added the back-office services firm executive cited in the first instance. The official added that back-office firms such as Genpact, WNS, EXL Service, Firstsource and Intelenet, which have investments from PE players, have been in talks with each other and mulled a merger.
“Yes, there will be some consolidation in the near future. BPO is all about scale and unless you have the scale it will be difficult to survive or grow, unless you have niche capabilities,” said Keshav R. Murugesh, group CEO, WNS Global Services, without specifically commenting on his company’s plans.
Private equity investors in back-office firms include Warburg Pincus, ICICI Ventures, General Atlantic, Oak Hill Capital Partners and Blackstone.
ICICI Bank, which holds a 21.38% stake in Firstsource Solutions Ltd (formerly ICICI OneSource Ltd), has to reduce its stake to below 5% by the end of this fiscal, as required under US regulations governinig banks. Both ICICI Bank and Firstsource have operations in the US.
When contacted, an ICICI Bank spokesperson said: “These are financial investments and we will explore opportunities for divestment at an appropriate time.”
Another factor which is driving the trend is clients’ preference for integrated IT and back office deals. “Pure-play BPOs are facing the heat,” said Vijay Gautam, senior IT research analyst at Jaypee Capital Services Ltd. “They have limited options, either offer more integrated services like IT services players or face the risk of being edged out slowly over a period of time.”
Large enterprises in markets such as the US and Europe are going through a vendor consolidation process where they just want “one neck to choke” and not multiple technology vendors supplying bits and pieces of their corporate IT requirement, he added.
“Clients are realising the value proposition of integrated deals and are asking for it,” said Ashutosh Vaidya, senior vice-president, Wipro BPO Solutions. Wipro BPO contributed 10.6% to Wipro Ltd’s overall revenue for the year ending 31 March 2010, and Vaidya said that in the last 12-18 months, Wipro had signed 5-6 large deals totalling $1 billion which have IT and BPO bundled into them.
Another factor which is playing out is the pressure on margins that large pure-play back office service firms such as Genpact, WNS and EXL Services have seen over the last four quarters.
Genpact, the largest among them , saw its profit margin shrinking from around 12% four quarters ago, to around 9% in the quarter ending June 2010.
lison.j@livemint.com
Comment E-mail Print Share
First Published: Thu, Sep 16 2010. 11 42 PM IST