India Citigroup and General Electric pioneered the use of India’s potential for providing cheap services to their global operations years before outsourcing became popular. But if their recent moves are any indication they have divergent views on the way they want to manage their businesses in the future.
Early this year Citigroup decided to take private its Indian business process outsourcing (BPO) subsidiary eServe International, which is listed on the local stock market. General Electric is spinning off its global business process operations, GE Capital International Services (GECIS), into an independent company.
On November 8, GE agreed to sell 60% of GECIS to Oakhill Capital Partners and General Atlantic Partners, two US private-equity firms, for $500 million.
GE says the decision to sell “was driven by the opportunity to realize significant value from GECIS’s scale and to broaden its global offerings” to non-GE clients. Set up in 1997 GECIS supports 1,000 business processes across GE’s 11 business units, and has more than 17,000 employees.
In April Citigroup offered to acquire the 55% public shareholding in eServe International and delist the company. The bank agreed to pay the Rs975 a share demanded by minority investors who participated in a reverse book-building process in August and it is estimated that the buyout of will cost Citigroup about $150 million.
Sensitive data
Bankers close to the deal say the move to delist eServe stems from Citi’s growing need to protect sensitive data and processes handled by eServe. As a listed company, eServe could have been exposed to pressures from investors to grow revenues by taking on other clients, something that Citi would rather not have it do for now.
Recent acquisitions of BPOs have involved global firms picking up stakes in independent providers to gain a quick entry into the market. IBM Global Services agreed to pay $129 million for BPO firm Daksh early this year and Indian IT services company Wipro acquired Spectramind last year. Barclays bought 50% of Intelnet Global, a Mumbai-based BPO company, in November for $36 million and UK insurer Aviva paid $12.5 million for a minority stake in Exl in July.
Susir Kumar, CEO of Intelnet Global, says multiple-client or independent BPO providers optimize costs better than a single-client “captive” service provider and are likely to get a higher valuation from investors. Perhaps that is what prompted British Airways to sell down its majority stake in its BPO arm WNS four years ago to private-equity firm Warburg Pincus and transform WNS into an independent company, much as GE has done with GECIS.
The discount placed by investors on captives is not present in the price that GE got for GECIS, says Saurabh Shah of Citigroup Global Markets, sole advisor to GE. “The risk inherent in the single-client exposure of a captive is not present in the price because GE is a triple A rated company,” he says.
The GECIS purchase puts an $800 million price tag on the company, two times its annual revenues. Investors buying into a captive look for revenues locked in the company once it is spun off, points out Donald Peck, head of Actis, a private-equity firm that sold its stake in Daksh to IBM. GE, which still owns 40% in GECIS, is reported to have signed a three-year outsourcing contract that will commit revenues to GECIS.
Public investors might have to wait to invest in pure play BPO companies because, apart from eServe, none is listed. A few listed IT service companies such as Wipro, Infosys and Mphasis run BPO businesses. Citigroup’s Shah says the industry needs to mature before more companies can list.
There are no indications as to whether other multinationals, such as Amex, HSBC, JPMorgan and Morgan Stanley, will follow Citi and GE and sell their captive shared service arms in India.
Investors prefer a diversified client base and GECIS’s ability to build one is yet to be demonstrated, says Rohit Kapoor, president of EXL, a BPO company in which Aviva has a stake. Investors Oakhill and GAP are betting half a billion dollars on the hope that GECIS will live up to expectations.
