Survival of the best? seems to be the mantra in the $12.4-billion Indian BPO industry. The last three months saw big acquisitions like Genpact buying Headstrong for capital market expertise and EXL Service acquiring Outsource Partners International (OPI) for deeper domain in finance and accounting (F&A). The reason here is clearly possessing vertical skill, having a bigger portfolio to offer to existing customers, and acquiring new customers. Another important acquisition which happened recently was that of Serco gobbling up Intelenet, which analysts feel was for acquiring domestic BPO market capability. But dig deeper and there is a bigger background behind these acquisitions, which one could rightly describe as the ?fourth wave? of acquisitions in the IT-BPO industry last decade?the BPO consolidation wave.
It is no more about big IT companies buying BPO firms to offer bundled services, captives being sold out or multinationals buying offshore capabilities through acquisitions. Today, is the era of BPO consolidation which has risen because of the big companies wanting to get bigger and the smaller ones struggling to sustain their market share. Even the scale of acquisitions has gone up as compared to what was in the past with Headstrong being acquired for $550 million and Intelenet BPO for $634 million.
Enhance verticals, acquire customers
Last month, the country?s largest BPO $1.3 billion Genpact acquired Headstrong for $550 million. NV ?Tiger? Tyagarajan, president and CEO of the company explains,?The strategic dynamics behind acquiring Headstrong was to enter a new vertical?the capital markets and investment banking vertical, and not just getting IT expertise. With this acquisition, capital markets has definitely become one of our top three (biggest) verticals for Genpact.?
Prior to Headstrong acquisition, Genpact?s vertical split was 39% for BFSI, industry and manufacturing comprised 39% and the remaining 22% business came from retail, transportation, logistics, pharma, healthcare and media services. But, soon we will see a different picture. Consulting and IT services firm Headstrong has specialisation in the capital markets and generated revenues of approximately $217 million in 2010. Genpact expects Headstrong?s long-term growth rate to be in excess of 20% per year. The company is still open to acquisitions in analytics space for boosting its pharma and insurance verticals, says Tiger.
Same is the case with EXL Service which recently signed an agreement to acquire Outsource Partners International (OPI), a provider of F&A outsourcing services.
Prior to this acquisition, EXL was over dependent on the insurance vertical which got it 55% of the business. But says Pavan Bagai, chief operating officer of EXL Service, ?We wanted to be more than just ?insurance?.
After this acquisition, F&A will contribute 30% to our revenues and as a consequence insurance will be 35% to 40%.? Earlier, F&A for EXL was just 10% and the rest of the business came from utilities, travel, transport and logistics. ?We want to be category killers, and not big in size and revenue,? says Bagai.
Rohit Kapoor, president and CEO of EXL states, ?OPI has over 3,700 professionals globally, approximately 80 clients, and an extremely talented management team. By combining EXL?s F&A outsourcing and transformation capabilities with OPI?s end-to-end F&A outsourcing capabilities and proprietary platforms, we will assemble a comprehensive set of F&A solutions. This will firmly establish our onshore outsourcing presence in the US while enhancing our European and Asian delivery footprint.?
Analysing the mindset of BPO vendors, Sid Pai, partner and managing director at TPI Advisory says, ?There is a bit of turnaround in the BPO market. Vendors are looking at various business combinations and are becoming full service providers. They realise that being specialised and sticking to few verticals is fine only till a particular size. They also need to have different expertise on their plate as they grow.?
The larger picture
Pai takes us through the four waves of consolidation over the last decade, ?The first wave of acquisitions was when IT companies were looking for BPO capabilities, then the second wave was when non-Indian companies were trying to buy offshore capabilities. During the recession, we saw captives being acquired for monetisation portraying the third wave. At present, is the phase of BPO consolidation which aims at increasing customer acquisitions.?
Earlier, BPO players believed that they could build new segments and capabilities organically. But, now the mindset is changing and BPOs are acquiring to enter new business and capabilities. Even buyers now want to deal with fewer vendors.
Though acquisitions happened earlier as well, but Nikhil Rajpal, partner at Everest Group, a management and consulting firm, explains that there is a scale difference now. ?Previously, acquisitions have been smaller but now the scale is increasing to face the competitiveness in the market. Earlier, the acquisitions were in the average range of $10-50 million, but now the scale has increased to $100-$500 million. The BPO players are now aspiring to be big companies with a billion dollar in revenues.?
Another reason for these acquisitions is the private equity (PE) investors wanting to exit BPO players. This leaves the vendors with no choice but to be sold out. Analysts feel that this is a win-win situation for both acquirer and the acquired company. This is because struggling companies want to get sold and the bigger ones have enough cash to buy niche players and add expertise. Another common thread in all acquisitions is entering onshore capabilities or newer geographies through acquisitions.
Amneet Singh, vice-president, global sourcing at Everest Group concludes, ?Post recession, the BPO industry is picking up and maturing too. We will see similar acquisitions in the future which are to build capability, and not just scale.?
