Genpact adds muscle in IT services

Genpact adds muscle in IT services

New Delhi: Genpact Ltd is acquiring Headstrong Corp. for $550 million (around 2,430 crore) in a deal that will give India’s largest back-office services firm a stronger presence in information technology (IT) services and consulting as well.

The acquisition, announced by Genpact on Wednesday, will also reduce its dependence on General Electric Co. (GE), its one-time parent, which still accounts for 38% of revenue. It will also help the back-office services company grow faster.

“Headstrong is complementary high-growth business for us. This doesn’t mean we are becoming another company to join the IT league. We are looking at gaining end-to-end expertise in the verticals we operate in," said Pramod Bhasin, president and chief executive officer (CEO) of Genpact.

Customers have shown a preference for having their IT and back-office needs serviced by the same firm, making it difficult for stand-alone back-office services firms. Genpact does offer some IT services, but their contribution to revenue has steadily declined, from 24% at the end of 2007 to 20% at the end of 2008 and 14% at the end of 2010.

“(This) looks like a really good deal for Genpact," said Abhishek Shindadkar, IT analyst at brokerage firm ICICI Securities Ltd. “They have cash, and they are adding about 20% of their revenues with this acquisition, with a services play."

The move will allow the company to enter the services market, particularly in capital markets and healthcare, said Sunil Padmanabh, research director at Gartner India.

“This is a good move for a proven back-office services company, and a good expansion of portfolio," he said. “As far as this space is concerned, we are likely to see more consolidation, and it is the right thing for the industry."

The acquisition also gives Genpact the benefit of economies of scale, becoming increasingly important in the IT and back-office services business. Headstrong adds at least one-fifth to Genpact’s revenue, and will take it to around $1.5 billion.

“We have always been strong in the front-end, being very onsite-focused, but lacked the back-end," said Sandeep Sahai, CEO of Headstrong. “We had no scale or capability to set up delivery centres across the world. Genpact will give us that edge."

Earlier this year, Nasdaq-listed iGate Corp. acquired a majority stake in Mumbai-headquartered IT services company Patni Computer Systems Ltd for around $1.22 billion.

Headstrong, which boasts capital markets domain and technology expertise, counts nine of the world’s top 10 investment banks as clients and will add to Genpact’s banking, financial services and insurance practice, which contributed almost 40% to the revenue of the back-office services firm in 2010.

Headstrong derives 66% of its revenue from work done where its customers are located (known as onsite work). Bhasin did not disclose the margins at which the company operates, but said that Headstrong’s billing rates are much higher than those of Genpact, which has 43,900 employees to the 3,700 at the company it is acquiring.

Genpact ended 2010 with a net profit of $142.2 million. Headstrong’s net profit wasn’t disclosed.

Genpact plans to fund the transaction with a combination of existing cash and debt, and is expected to close the deal by 31 May, subject to regulatory approvals. Of the total amount, $300 million will come from cash on the company’s books, while the remaining $250 million will be raised through debt.

Genpact had $481 million of cash, cash equivalents and short-term investments as of 31 December. “We will still have around $200 million of cash on our balance sheet with the net debt/Ebitda at 0.4%," said Bhasin. Ebitda or earnings before interest, tax, depreciation and amortization is a measure of profitability.

The company expects the deal to contribute to an increase in its earnings per share immediately.

Genpact was founded as a unit of GE and spun off into a separate entity in 2005. It has since been listed on the New York Stock Exchange (NYSE). GE, through affiliates, still holds a 9.14% stake in the company, while private equity (PE) firms General Atlantic Partners Llc and Oak Hill Capital Partners own around 41.04%.

In 2010, Genpact grew 12%, slower than the industry average of 14%. Before the acquisition, the company expected to grow by 10-13% in 2011, while industry lobby Nasscom expects the industry to grow by 16-18%.

Headstrong was founded in 1981 as James Martin Associates and renamed in 2000.

In 2003, TechSpan Inc. was merged with Headstrong. TechSpan was founded by Arjun Malhotra, one of the six co-founders of the HCL group.

Citigroup Global Markets Inc. and UBS Securities Llc were financial advisers to Genpact, and Cravath, Swaine and Moore Llp its legal adviser. Morgan Stanley and Co. was the financial adviser to Headstrong, and Kirkland and Ellis Llp its legal adviser.

Genpact’s shares were trading at $15.38, up 4.2% at 8.30pm India time on NYSE.

This acquisition marks the exit of PE firm Welsh, Carson, Anderson and Stowe, a significant investor in Headstrong. It invested $173 million in the company in 2000 for an undisclosed stake.

Sridhar K. Chari from Bangalore contributed to this story.