Monday, 8 September 2008

Appetite for BPO acquisitions to be tested yet again

The news that US banking software and services player, Metavante, is to sell its 20% stake in Indian BPO, Firstsource (see FT 8th Sept 08 - Firstsource sale may spark sector shake-up ) should reveal an interesting insight into the appetite for BPO acquisitions by private equity firms and (particularly) Indian SIs alike. The stake, currently worth some $80m (before any M&A premium), would be small change for these players, though pales in contrast to the mooted $800m that BT has valued its stake in Indian BPO, Tech Mahindra (see Reuters 8th Sept 08 - PE Firms eye BT's stake in Indian outsourcer). Firstsource generated just under $300m in sales last year (to 31/3/08) with 11% margins and gets nearly 30% of its revenues from the UK, though this was around 45% a year ago.

Among the PE 'likely suspects' FT put in the frame for Metavante's stake are General Atlantic, Blackstone and Warburg Pincus. The most prolific BPO investor among these is GA, with stakes in ex-GE Indian captive, Genpact, India SI Patni, "our very own" Liberata and Xchanging, US-based HR players, Hewett and TriNet, and Emdeon Business Services, the firm providing transaction processing services for Sage's healthcare division (the erstwhile Emdeon Practice Services). Blackstone holds a stake in India-based Intelenet and WP in WNS, the ex-BA captive which recently scooped a $1bn megadeal with UK insurer, Aviva. We would fully expect the top-tier Indian SIs to be sniffing around Firstsource too, though they'd have some work to do on the margins, which vary between the players, but can top 20% (e.g. Infosys, HCL). Both these players have made BPO acquisitions, Infosys taking out Philip's F&A captive, and more recently, HCL buying Liberata's financial services division.

The question we'd ask is what the PE firms really hope to gain from their BPO stakes over and above investments they could make in other sectors? There's little sign of any integration plays (i.e. knock a few of them together and make a mega-player) so they must be relying on value appreciation, which in the current environment could be a long time coming. We'll take a closer look at this issue in future commentary.

Whatever happens to the Metavante stake, we see little to concern UK BPO leader, Capita. It's interesting, isn't it, that Capita, with still relatively little offshore delivery, regularly delivers 12-13% margins, so you'd have to ask what is Firstsource (and some of the other Indian BPOs) doing wrong?

Footnote - Any difference readers might detect in the 'style' of the article above will become apparent in a couple of weeks time...

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