It’s now becoming increasingly clear that acquisitions are required just to keep up with the pack.
By
10 Oct 2008
TCS has acquired Citigroup Global Services Limited (CGSL), the captive BPO arm of Citigroup, which in turn will pay TCS $2.5 billion over 9.5 years for ongoing provision of BPO services. The deal once again marks TCS as the boldest and most aggressive of the leading Indian offshore services companies at a time when acquisitive growth is a key strategy for the industry.
Indian firms are in acquisition mode
This is further proof that big acquisitions are now on the agenda of all the leading Indian IT services vendors. TCS, Wipro and HCL have now all made significant steps with their acquisition strategy – leaving Infosys and Satyam, who have so far not been as aggressive in terms of M&A – to reconsider their inorganic growth strategy.
It was Wipro, the most acquisitive of the leading players, that started the big deal ball rolling when it acquired Infocrossing for $600 million last year. Infosys also took on Philips’ F&A BPO captive last year in a $250 million deal. Meanwhile HCL Technologies is already on its third acquisition of the year, having just beaten rival Infosys with a £440 million offer for UK-based SAP services provider Axon. Over the summer HCL also picked up UK BPO player Liberata’s financial services division as well as US-based Control Point Solutions.
But TCS has not been shy either, and this isn’t its first big BPO deal. In 2006 it acquired Pearl Group’s life and pensions operation in the UK, with a contract worth over £400 million to boot. And to top it off, last week a German newspaper reported that TCS was interested in buying SIS, the IT services business of Siemens.
This really is a ‘big deal’ for TCS
The ramifications of this deal for TCS go beyond just the purchase price and the contract revenue that comes with it. It is a good example of an end-to-end relationship with Citigroup, as this deal builds on existing applications, infrastructure, and support services that TCS provides the bank.
This is the ‘Holy Grail’ for any global IT services vendor – but very few, particularly amongst the Indian vendors, have managed to pull off such a feat. Now more than ever, TCS can justify its positioning as an end-to-end service provider.
But of course there are a lot of impressive numbers attached to this deal too. The contract will push TCS’s annual revenues up by about 5 per cent. And even better, CGSL is running EBIT margins of 20 per cent, which is respectable and won’t dent TCS’s own 27 per cent margins too significantly.
CGSL also brings with it a good balance of regional revenue streams, with more than a quarter of its revenues coming from Europe, another quarter from India, around 40 per cent from North America, and the rest from Asia-Pacific. CGSL brings 12,500 experienced staff – about half the number of new people that TCS would usually hire each year.
Captive versus competitor
It’s now becoming increasingly clear that acquisitions are required just to keep up with the pack. Indian vendors are under a lot of pressure to maintain their high margins, but there are few quality purchases to be had in the West – ones that will not dent margins too much, but also bring new added revenue streams and an ability to move up the value chain.
Purchasing a captive operation, which comes with a guaranteed revenue stream and well established operations, is one way of reducing the risk of an acquisition – and it’s something that TCS and Infosys clearly favour. But identifying and valuing such deals can be more challenging than purchasing a business on the open market. This is perhaps one reason why HCL and Wipro have been more than happy to pick up IT services firms over captive operations.
Nonetheless, with the state of the global economy reducing valuations across the board, Indian vendors will be even more keen to get involved in M&A – captive or not. The race is now on to get the best quality buys!
