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M&A calling

M&A calling
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First Published: Thu, Jun 28 2007. 12 04 AM IST
Updated: Thu, Jun 28 2007. 12 04 AM IST
Last week, when US private equity firm Blackstone Group snapped up an 80% stake in Mumbai-based Intelenet Global Services in a $200 million deal, India’s $8 billion business process outsourcing (BPO) industry saw yet another instance of the hectic pace of consolidation that is under way. And if the pipeline of prospective deals is anything to go by, the momentum will only increase over the next few months.
Global financial services major Citi has put its captive Citigroup Global Services on the block for an estimated $750 million, and IBM Corp. is actively scouting its next big buy after the $160 million acquisition of Gurgaon-based Daksh eServices in 2004. The fact that revenue growth rates in the sector have remained stable, a steady 40%-plus year-on-year despite all the buying and selling, shows that consolidation has been healthy for the industry. To keep growth at those levels, consolidation is an imperative.
The BPO industry today is made up of 300-plus companies. They are split into captive and third-party vendors, with each sharing an equal portion of revenues. The third-party segment is further split into two—companies owned by large corporate groups and the independents. The consolidation we see today largely concerns the independents, which are typically backed by private equity investors. Companies such as Firstsource, WNS Global Services, 24/7 Customer and EXL Services fall into this category. Most of the acquisitions have been done by the first category of players.
The targets come from two areas—independent players backed by private equity investors and captive outfits. In both cases, private equity has an important role to play. While it senses that handsome valuations can be achieved by exiting independent firms now, valuations are still attractive enough to buy into captives seeking to go third-party as well as smaller independent plays. Since the 2003 acquisition of Gurgaon-based Spectramind eServices by Wipro Technologies for $93 million (it sold at two times revenues), the cost of buying companies has not gone up much. Valuations have more or less remained within the manageable 1.5-2.5 revenue multiple range.
The endgame of the ongoing consolidation will be to create a third-party dominated industry that accounts for at least 80% of revenues, against 50% now. It is important that third-party players emerge as a major force because in another five years, maybe less, the captive model, which gave birth to the Indian BPO industry, will become redundant. We’ve already seen evidence of this. In 2004, General Electric sold 60% in its Gurgaon-based captive for $500 million to PE investors General Atlantic and Oak Hill Capital Partners. GE’s decision to sell was driven largely by rising costs of operations, which were becoming unmanageable in a captive environment. But the sell-off also created Genpact, the country’s largest and most sophisticated third-party BPO services provider.
The Genpact model—services backed by deep domain expertise, multiple geography delivery capabilities and an even mix of voice and non-voice services—will be BPO’s future model and will determine whether Indian BPOs will continue to hold sway over the global BPO market. It is important for the top 15 third-party vendors to achieve this model quickly. Recent expansion activities by all these players indicate that they are moving towards this model. So far, it has been largely organic expansion but acquisitions are a matter of time. BPO contracts are getting bigger and more complex. Customers now want continuity and end-to-end services and only vendors who demonstrate the ability to deliver along those specifications will remain in business.
Does the Indian BPO industry need even more consolidation? Write to us at views@livemint.com
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First Published: Thu, Jun 28 2007. 12 04 AM IST
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