M&As lead new pecking order

Written by Diksha Dutta | Diksha Dutta | Updated: Aug 29 2011, 06:50am hrs
Eating someone elses lunch seems to be the triumph tune in the $12.4 billion Indian business process outsourcing (BPO) industry. Acquire, consolidate, buy and you are the top performer. And if you cannot, then fall down the ladder. Not-so-distant history reveals that the BPO players which have been acquiring companies constantly or did big ticket acquisitions over the last five years, have either jumped to the top or remained intact. On the other hand, decent sized BPO players which started as top players, but were not able to merge other companies with themhave suffered or even got acquired by the bigger players.

The solid wave of acquisitions was seen in the pre-2008 era, which changed the pecking order in the industry to an unpredictable extent. And today it seems the trend is back with five acquisitions already registered in the last four months. The pecking order is expected to reshuffle again in the next 18 months, feel industry experts. Even the recent BPO rankings by IT industry forum Nasscom had some surprises in terms of who overtook whom in export revenues this year, courtesy their merger & acquisition (M&A) strategy.

Step back in FY 2005: WNS Global Services, Wipro BPO and HCL BPO were the top three players. Even EXL Service was amongst the top five. But HCL BPO, the BPO arm of countrys fourth largest IT company (HCL Technologies) hardly did any acquisitions since then except small sized deals like Control Point for $20 million in early 2008, which is way below the average deal size of the industry. At present, the scale of acquisitions has increased $100-$500 million, as an industry average.

Cut to present: HCL BPO is not in Nasscom rankings and is making losses too, partial reason being lack of strategic acquisitions. Sangeeta Gupta, vice-president at Nasscom says, Mergers and acquisitions have had a big hand in changing the ranking of BPOs in the last five years. Inorganic growth has played a very important role for disruptors like Genpact, TCS, Aegis and Cognizant to achieve top rankings in the BPO charts. However, other players too did acquisitions, but the strategic outlook might have lacked.

BPO vendors are realising the need to acquire today, than anytime before. A look at the action this year: In April, Indias largest BPO Genpact acquired Headstrong, an IT services firm, for $550 million. British support services provider Serco Group bought Mumbai-based BPO firm Intelenet Global Services for $634 million in May.

Around the same time, there were small ticket acquisitions too. EXL Service acquired US-based Outsource Partners International (OPI), which provides finance and accounting outsourcing services, for $91 million. Very recently, Hinduja Global Solutions (HGS) acquired Canada based On-Line Support (OLS), a customer relationship management firm, for C$74.8 million cash and HCCA services from another IT company 3 i Infotech.

The M&A achievers

Genpact CEO Tiger Tyagarajan explains what kept the company going strong: In the last six years, all the acquisitions that we did have been around capability. Most of them have been small acquisitions except the recent consolidation of Headstrong. We looked for capabilities around specific mortgage, SAP, audit business, analytics for retail and consumer packed goods (CPG), capital markets etc. So we only acquire what we do not have. The company did the $550 million Headstrong acquisition at a time when industry spectators feared that TCS BPO, the BPO arm of Indias top software exporter might over take it in annual revenues. The revenue gap between the two was only $226 million prior to this acquisition. And even now, Tyagrajan is open to acquisitions.

TCS had acquired the back office operations of Citigroup in 2008 for $505 million, being the biggest acquisition in the industry till then. Without any doubt, it has helped the company in phenomenal growth. Even today, TCS BPO is the second biggest BPO after Genpact, being nowhere in FY2005. Says Abid Ali Neemuchwala, global head of TCS BPO Services, In the past we have identified our gaps and made acquisitions ahead of time in the right space. But now we are not looking at acquisitions;we are more focused on organic growth. We will be very selective in acquisitions now.

A company whose growth has been driven majorly by acquisitions is Mumbai-based Aegis; it has done 18 acquisitions between FY 04 and FY 11. The market capital of the BPO has increased from $62 million in 2004 to $700 million today. Aegis MD and Global CEO Aparup Sengupta explains, Acquisitions have contributed 50% to our growth and the rest 50% was due to our organic growth. We plan to reach $1 billion by FY 2012, but this will be organic growth as we are still digesting our previous acquisitions. Aegis has acquired companies like Avaya Global Connect (AGC) Networks, Sallie Maes customer service centre in Texas, Australian BPO UCMS and CCN Group.

Hinduja Global Solutions entered the top 10 this year in BPO rankings. The company did two acquisitions this month alone and has done eight acquisitions in the last 7 years. Partha De Sarkar, CEO, HGS comments: Cash was the king during 2008-2010 and everybody wanted to conserve cash. But now, people are eying acquisitions. We have done 7 acquisitions in the last 8 years and it has helped us a lot in the growth. The motive behind them is to enter newer geographies and we will continue to look for acquisitions even in the future.

Slow on acquiring

Analysing how some BPOs could not sustain top positions, the list is not short. EXL Service, once amongst the top five BPOs in the country is today the 9th largest. In an earlier interaction, Rohit Kapoor, CEO of the company mentioned, We have been very conventional with acquisitions in the past and will continue to so. We acquire only when we are fully convinced that the company will add value. The biggest acquisition for the company since 2006 has been the recent OPI deal worth $91 million. In 2010, it bought American Express backoffice operations in India for $30 million and also picked up Schneiders language and finance and accounting (F&A) operations in the Czech Republic in July 2009 for $6 million.

Intelenet Global Services too got acquired by Serco for $684 million this year and is not among the top 10 BPOs now. Private equity investor Blackstone backed Intelenet had acquired no company since 2007. Companies which have PE funding have more chances of being acquired anytime, as their investor can exit when the cycle is over. But self funded or parent group funded BPOs have a lesser of this fear, says Hinduja Global Solutions Sarkar.

Though WNS Global Services started as a top BPO and did decent acquisitions till 2008, analysts feel that the strategic mindset lacked which did not let the company digest those acquisitions well. Explains Keshav Murugesh, CEO of the company, We have done a lot of acquisitions traditionally and growth has come through them in the past. Our competition is focusing on acquisitions and increasing growth, but I am much more focused on organic growth now.

But with acquiring too much, also come challenges and they need execution. Sanjay Sinha, executive vice-president, M&A (HR) and new initiatives at Hinduja Global Solutions says, Once the deal is signed, it takes us 100 days to fully merge the company. HR becomes a part of the deal from the very first day of discussion. And by the time the deal is signed, we have complete synchronisation with the company to be acquired. The acquirer and the acquiree mutually agree on a 100-day plan to digest the acquisition. As a result, panic does not exist by the time the acquisition takes place.

But Raghavendra K, vice-president and head, human resources at Infosys BPO feels that it takes much longer to digest an acquisition. When an acquisition deal is about to be signed, the HR process starts 6 months in advance. I depute three HR managers to map all the HR policies of the company to be acquired. We do not fire anybody while acquiring a company. Once the deal is signed, it takes another 12-18 months to digest an acquisition from an HR perspective.

Sid Pai, partner and managing director at TPI concludes the rationale behind acquisitions in this industry: In the BPO industry, at some level, inorganic becomes the best option to grow when you want to acquire capabilities. At present, it is natural to except higher consolidation in the industry considering the opportunities a BPO player gets by buying customers through acquisitions.