Political rhetoric in the US about the loss of service-sector jobs to India has not deterred American companies from consolidating their offshore outsourcing business in the country.
Early last month, for example, IBM announced the acquisition of Daksh eServices, India?s third-biggest business process outsourcing (BPO) company.
IBM is estimated to have paid about $160 million and the deal marks its entry into India?s fast-growing $3.6 billion BPO industry. IBM has a large IT services business in India, with more than 7,000 employees.
A few days later, Citigroup announced that it would buy the listed shares of E Serve, a BPO subsidiary, at an estimated cost of $126 million. Convergys, Electronics Data Services (EDS) and Affiliated Computer Services (ACS) are looking to acquire bits of GE Capital?s large BPO business in India.
Citigroup and GE are pioneers in the offshore BPO business in India.
Other US companies looking to set up an offshore outsourcing base in India include Coca-Cola, and Wall Street investment banks such as JPMorgan and Morgan Stanley have set up subsidiaries in India in recent years. HSBC announced in April that it would set up a new facility in India this year to provide analytical inputs to the bank?s global research work; it already has a back-end transactions processing centre located in Hyderabad.
Donald Peck, who heads Actis, a UK private-equity firm that sold its stake in Daksh to IBM, says that the deal was timely. ?There is pressure on non-niche BPO players to find a strategic investor. Daksh has the advantage of being the first mover, but there is pressure on profit margins and it is harder to invest in non-niche BPO companies today.? Actis, now a limited partnership that emerged after a management buyout of Commonwealth Development Corporation Capital Partners, Citigroup and General Atlantic Partners, owned around two-thirds of the equity capital in Daksh.
Market analysts, however, say that Daksh investors might have been under pressure to sell to IBM after one or two of its large US clients reportedly signed long-term contracts with IBM Global Services. Rather than wait to exit in the IPO being planned, they decided to cash out. At around three times revenues, the price IBM paid seems low considering that Daksh?s revenues are growing at about 50% a year. Most compare it to Spectramind, a large BPO company, valued at just under $500 million when Indian software services company Wipro acquired it two years ago.
Consolidation seems inevitable in an industry that is growing annually at over 50% and faces the challenges of maturity. The political backlash in the US and high attrition rates of Indian BPO companies are causing concerns about security-related issues and the quality of service. As large global players move offshore to India, small venture-financed, entrepreneur-managed Indian vendors find it tough to stay in business.
Ashish Dhawan, who heads ChrysCapital, a venture capital firm that has investments in several Indian BPO companies, expects more consolidation over the next year. ?The bar is being raised for companies that want to be serious players in the industry. It has become a big boys? game.? TransWorks, a call-centre company in which ChrysCapital was invested, was sold to a large Indian industrial group, Aditya Birla, last year. Rizwan Koita, joint president, TransWorks, says large global outsourcers and large Indian companies seeking a quick entry into the offshore BPO business are the principal buyers. EDS and Tata Consultancy Services, India’s biggest software exporter, are tipped to be in line to buy a Bangalore-based BPO subsidiary of US insurance company Phoenix.
GE Capital International Services is selling its IT helpdesk and network security businesses in what seems to be a ?shuffle in assets where the company might not have the best cost structure?. GE outsources to at least five other Indian BPO vendors, including Birlasoft, in which it also owns a small stake.
Citigroup?s move to take E Serve private rules out any immediate spin-off, and that it will continue to be E Serve?s sole customer.
Private-equity investors will look to make fresh investments in BPO companies that provide specialized services, in niche areas such as finance and accounting, where ?the focus and expertise makes the difference?, says Dhawan. Actis invested about $4 million last year in Global Realty Outsourcing, which provides analysis and back-office services to the US real-estate industry, and ChrysCapital invested about $5 million in TechTeam, an enterprise helpdesk services company.
Few BPO companies are listed on the stock exchange and the market is eager to trade their shares. A few large independent BPO companies could tap the market over the next 18 months, says Saurabh Agarwal, vice-president, DSP Merrill Lynch. The names at the top of the list are WNS Global Services (spun off by British Airways), Zenta, vExcel, vCustomer and ICICI One Source.
