Mumbai: US investment bank Morgan Stanley has put its captive business process outsourcing (BPO) operations, Morgan Stanley Advantage Services Pvt. Ltd (MSAS), on the block.
MSAS, based out of Goregaon, a Mumbai suburb, employs close to 2,000 and could be valued at a minimum of $500 million, according to some investment bankers.
People close to the company confirmed to Mint that the captive business operation’s sale is indeed on the cards. However, Morgan Stanley is yet to start talks with potential bidders and has not appointed an external adviser.
Narayan Ramachandran, chief executive and head of Morgan Stanley India Co. Pvt. Ltd, declined to comment.
According to several industry insiders, this move could have been triggered by the subprime mortgage losses made by the bank in the US.
Morgan Stanley, the second largest securities firm in the world with $782 billion worth of assets under management, posted a $3.61 billion net loss in its fourth quarter in 2007, which, in the words of chairman and chief executive John Mack, was “embarrassing”.
In late 2007, the firm lowered the value of its subprime holdings by $9.4 billion in two write-downs and also sold a $5 billion stake to sovereign wealth fund China Investment Corp.
There has been persistent speculation in recent months that US financial conglomerate Citigroup Inc., also hit by the mortgage crisis, would also like to sell a majority stake in its BPO unit, Citigroup Global Services.
Investment bankers in Mumbai said the valuation of Morgan Stanley’s operation could be in line with Citigroup’s BPO. The industry’s average deal multiples, from historic deals, is three times the revenue or 12-15 times Ebitda (earnings before interest, tax, depreciation and amortization).
Pijush Sinha, executive director and head of BPO practice at IT-specialist investment bank Avendus Advisors Pvt. Ltd, said the valuation of a captive BPO “depends highly on the contract size and term” from its parent company. “If a good long-term outsourcing contract is part of the deal, it will attract strategic buyers,” said Sinha, referring to a recent deal involving Indian software developer Infosys Technologies Ltd, which acquired the captive division of Dutch conglomerate Royal Philips Electronics NV’s finance and accounting BPO unit. As part of the deal, Infosys also signed a $250 million worth seven-year outsourcing contract with Philips.
India’s three largest publicly-traded BPO firms, Genpact Ltd, WNS Global Services and Firstsource, are all captive spin-offs. Genpact’s parent, General Electric Co., sold a 60% stake in the unit to private equity investors Oak Hill Capital Partners and General Atlantic for $500 million in 2004. WNS, earlier an in-house unit of UK’s carrier British Airways Plc., was sold to buy-out fund Warburg Pincus in mid-2002.
Firstsource, earlier the back-end support unit of ICICI Bank Ltd, now has a strategic investor in US-based Metavante Corp. and financial investors such as Aranda Investments Mauritius Pte. Ltd and Westbridge Ventures.
Genpact and WNS Holdings Ltd (WNS’ holding company), are both listed on the New York Stock Exchange and have market capitalizations of $2.78 billion and $693 million, respectively. Firstsource is capitalized at $547 million on the National Stock Exchange.
According to Deepak Ghaisas, chief financial officer of publicly traded IT products vendor i-flex Solutions Ltd, majority owned by US-listed Oracle Corp., the three large Indian BPOs and private equity players could be potential buyers for the Morgan Stanley operation.
Morgan Stanley had earlier filed an application with the Authority for Advance Rulings, seeking a confirmation that the BPO operation did not constitute a permanent establishment and the arm’s length pricing paid (the price at which two unrelated parties agree to a transaction) to the unit discharged it from any taxation in India.
A permanent establishment, said Anoop Narayanan, a partner at Majmudar & Co., can be attributed to a fix place, agents (employees) and equipment.
Morgan Stanley was represented by Mumbai-based corporate law firm Nishith Desai Associates. According to Nishith Desai, founder of the firm, “Indian subsidiaries of US firms are not subject to taxation in India,” according to a treaty between the two countries, “if they are not a permanent establishment.”
Morgan Stanley’s BPO unit is part of Morgan Stanley India and enjoys tax soaps under the Software Technology Parks of India provision
Incorporated in June 2003, MSAS supports Morgan Stanley’s institutional securities businesses worldwide from research to financial modelling and IT development. The company currently employs professionals working with Morgan Stanley’s investment banking, equity financial services, equity research, fixed income and institutional equity businesses.