Home >Companies >‘There is no compelling case for consolidation at this point’

Mumbai: Managing director and CEO of Mumbai-based Firstsource Solutions Ltd (earlier ICICI OneSource),Ananda Mukerji, is one of most aggressive CEOs in the BPO space. In five years since Firstsource launched operations, Mukerji has pushed through six acquisitions. This January, Firstsource became the third BPO player to go public. The stock is currently trading at a premium of 23.43% to its listing price on the Bombay Stock Exchange. Mukerji wants to maintain the momentum on acquisitions which he believes remain key to its growth. In a candid interview with Mint, he explains why acquisitions smake sense and gives his take on the current phase of consolidation. Edited excerpts:

Why do acquisitions remain such an integral part of your growth strategy?

In this industry you need to be able to acquire to grow—not just the topline but also capabilities. Building new capability organically is very hard. Nobody wants to be your first customer, even if you are a $200 million firm. Even an existing customer for whom you may be doing a superlative job will not outsource a new process if you cannot demonstrate expertise. Since inception, we have been focussing on the breadth of services. We didn’t wait to first build one capability and then move to the next. That doesn’t work because the market is growing too fast. It had to be done in parallel and the only way to do that was through acquisitions. It is still early days in the industry and we need to grow very fast for the next few years. Acquisitions in the past have been for enhancing capabilities and that will continue. One of the stated purposes of the initial public offering was to raise capital for acquisitions.

Will you do bigger acquisitions now?

We certainly can do bigger ones. In fact, if you look at our acquisitions historically, we’ve done fairly large acquisitions in relative scale to us. When we were a $40 million firm, we acquired a $25 million firm. That was 75% our size. Today, at $200 million revenues, we can obviously do much larger acquisitions. We also have the track record of knowing how to integrate companies which are large in relation to us.

You’ve been expanding your delivery network overseas in the past 12 months. How much of that has been driven inorganically?

The two are not related. It is one of our core competencies to set up operations, stabilize them and run them efficiently. We will not acquire a firm to set up delivery capabilities in a geography. In March-April 2006, we had two countries—India and the US. Today we have started operations in the UK with two centres and about 1,000 people, and have expanded our US footprint from one centre to six. Out of these, three did come through an acquisition. We’ve opened a centre in Argentina where we now have 400 people. A new centre is being commisioned in the Philippines. And we’ve expanded in India. The footprint allows us to look at onshore business that a year ago we didn’t even talk about.

Does private equity continue to be relevant to the industry?

It remains an industry that will continue to need PE capital. Such capital is also available to public companies like us. The industry has gone beyond venture capital, unless it is a very niche space.

How do you see industry structures changing in three years?

Consolidation is two relative-sized companies deciding that the whole is more than the sum of the parts. I’m not sure there is a compelling case for that in the industry at this point. When does consolidation take place in any industry? One, when growth begins to slacken. And, two, access to capital gets blocked or capital says it will only go to a certain category of players. None of that is happening in the BPO space now. You don’t call a $200 million firm buying a $50 million firm consolidation. What we are seeing now is smaller players who are unable to build scale getting marginalized. In three years, the percentage of captive BPOs will reduce in percentage terms. The argument for setting up a captive is getting more and more difficult because there are very good third-party vendors now. In the long term, IT services companies with BPO offerings and pureplay BPOs will flourish.

The industry’s average year-on-year revenue growth rate is 40%. How important is it to keep growth rates at such levels?

The global market opportunity is very large. If we don’t grow at this pace, someone else will. Several countries—Vietnam, the Philippines and China—have the potential to take chunks of business away from us. There is an opportunity as a country to dominate this space. We should play the entire value chain from very low-end work to very high-end work.

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