Bangalore: At least a dozen small and midsize outsourcing firms grappling with thinning margins, tight working capital and lack of opportunities for scaling up, have mandated banks to scout for buyers, said five investment bankers familiar with the development.
The bankers said the number of business process outsourcing (BPO) firms approaching them has increased by two-four times in the past four months. They declined to name the firms, citing confidentiality clauses.
Overseas interest: Industry experts say foreign companies have been scouting for BPO acquisitions in India for some months now, but no deal has been struck because of a lack of specific synergies. S Burmaula/Mint
But the bankers said most of these were BPO firms offering basic services to companies within India, unable to compete with larger rivals that have graduated to more complex outsourcing jobs.
“We built core competence in telecom and financial services, but now we are struggling. Clients are asking for end-to-end solutions,” said Gopal B. Iyer, principal investor and president of TriNet Solutions Pvt. Ltd, a 2,000-seat BPO company in New Delhi that is in talks with potential buyers for a complete buyout.
Iyer said the firm had to take a hard decision because of the limitations it faced in scaling up. Private equity firms had refused funding saying the company was too small to invest in, he said.
India’s BPO industry gained global dominance on the strength of the country’s large English-speaking population, high education levels and a clinching cost advantage.
The initial years were largely focused on voice-based and other basic services to overseas companies and then in the domestic market, but the industry has been maturing.
“Indian BPO firms are now increasingly focusing on transforming client businesses through a mix of re-engineering skills, technology enablement and new service delivery methods,” industry lobby group Nasscom said in a February report.
“Additionally, the engineering design and products development segments that involve IP (Internet protocol) driven service capabilities command an exports revenue share of 20%,” the report added.
Midsize BPO firms with 500-3,000 seats are hardly equipped to take on that kind of competition from rivals 3-10 times their size. Besides, profit margins have been thinning as salaries and expenses rise.
A voice-based call centre in Kolkata that has given a mandate to an investment banker to find a buyer, says it cannot scale up its operations because of thin profit margins of 2-3%.
“Surviving the way we are right now, we cannot bring economies of scale on our own. We are not desperate, but becoming part of a bigger entity seems like a sensible idea to us,” said a board member of the firm, requesting anonymity to avoid disturbing his clients and employees.
Industry experts say foreign companies have been scouting for BPO acquisitions in India for some months now, but no deal has been struck because of a lack of specific synergies. Consolidation in the industry, then, could be driven by large domestic companies acquiring the midsize firms.
“Merger of domestic companies without cash transfer would be ideal, provided they agree on valuation,” said Krishna Saraswati, associate vice-president at MAPE Advisory Group.
Once a sweet spot for institutional investors, BPO firms have so far raised $1.18 billion (around Rs5,465 crore today) since 2006. Many of the early investors in BPO firms are looking at exits now. “These companies are more suitable for M&A (mergers and acquisitions); they have to give an exit to their investors,” said C. Venkat Subramanyam, founder director of Veda Corporate Advisors Pvt. Ltd.
But it is not easy finding buyers, say investment bankers. “Why would a 10,000-seat (BPO company) buy a 1,000-seat firm? They might as well hire 1,000 people and not face issues of operations hassles (and) ego issues generally associated with takeovers,” said Deepak Srinath, director and co-founder of Viedea Capital Advisors Pvt. Ltd, a Bangalore-based investment bank.
Srinath said Viedea has been approached by three-four BPO firms every week for the past three months, but has declined taking them on as finding buyers is very difficult.
“It’s very difficult to find buyers for plain vanilla voice-based BPOs. BPOs need to have an attractive client list, or a high defensible offering, which adds value to attract buyers,” he added.