Monday, 6 October 2008

Xchanging looks to feast on Indian take-away

(By Anthony Miller). Having now heard the full screed from Xchanging CEO David Andrews and CFO Richard Houghton, it’s pretty clear to me that the Cambridge acquisition (see Xchanging to take control of Indian partner) could be a transformational deal. It’s not just that it bolsters Xchanging’s 550-strong Indian headcount by another 2,600. It’s also that the deal could well mark the beginning of Xchanging’s transition from a European BPO supplier to a global player. Indeed, once the deal completes, nearly 25% of Xchanging’s revenues will derive from outside of UK/Europe, including 17% from North America.

Management have had their eye on the US market for some time. Cambridge gives Xchanging access to some marquee global brands, including WalMart, Amex and Mastercard, in which there should be a great opportunity for Xchanging to cross-sell its HR and Procurement BPO services. Indeed, David Andrews has already despatched a couple of his top rain-makers across the pond to speak to some prime prospects. No letting grass grow underfoot here! Cambridge is also Xchanging’s entrée into the Australian public sector, via a couple of state government contracts. This marks a shift in course for Xchanging, which up to now has boasted its private sector credentials as a differentiator from the likes of Capita. Frankly I see this as a positive shift.

What also impressed me about this deal is the gritty persistence management have shown over the past 9-12 months to get the deal thus far. Indian regulators do not make it easy for foreign firms to take control of public companies, something I’m sure EDS and Oracle would stand testament to. Indeed, Mphasis (EDS) and iFlex (now Oracle Financial Solutions) both remain listed in India. I’ll be meeting up with David Andrews after the Cambridge transaction closes (expected 2Q09) to go through the ‘anatomy’ of the deal, as this should prove a valuable case-study for other UK players looking to follow Xchanging’s lead.

I have to say I’m a little surprised that none of the Indian ‘usual suspects’ had got to Cambridge first. OK, Cambridge is more onshore-based (c. 45% of total headcount) than the typical Indian player, but the attraction of access to top global brands would have been very alluring. Perhaps they were (unusually) asleep at the switch, but it sounds like it’s too late now as Xchanging has the support of Cambridge’s key (majority) shareholders. But of course, it’s not done till it’s done, so David Andrews and his team will be counting off the weeks (even months) before the transaction gets through all the various regulatory processes. In any event, Andrews and Houghton will replace Cambridge’s executive directors mid-November, assuming Xchanging’s shareholders approve the deal and that it doesn’t get referred to the competition commission. We really do wish them well.

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