[ppi] [ppiindia] Let the deals begin

** Mailing List|Milis Nasional Indonesia PPI-India **

NOVEMBER 22, 2004 

ASIAN BUSINESS 

India: Let The Deals Begin  
As Bangalore's outsourcing industry surges, takeovers
will be fast and furious 

 
It felt like the lights went on again in Bangalore.
Almost as soon as U.S. President George W. Bush was
reelected and the specter of a Democratic
Administration that might pull the plug on outsourcing
receded, the deals began to flow. On Nov. 8, Infosys
Technologies Ltd. (INFY ), India's top software
services company, announced a $1 billion secondary
offering of its shares. That same day, General
Electric Co. (GE ) sold a stake in its New Delhi-based
outsourcing subsidiary to U.S. investors for $500
million.

Bangalore is talking deals again. India's $16 billion
tech outsourcing sector -- centered around the
southern city of 6.5 million -- is growing at 30%-plus
annually as ever more foreign companies farm out help
desks, software writing, accounting, and more to
armies of young Indians manning phones and computer
workstations day and night. By 2008 the business could
bring in $50 billion a year, estimates India's
software services trade association, Nasscom. The
group believes as much as 30% of corporate tech work
can be outsourced, and so far less than 10% has been.

That potential has dealmakers from around the world
licking their chops. In the next 18 months, investment
bankers are expecting a wave of mergers and
acquisitions as competitors rush to achieve the
critical mass needed to serve global clients in
everything from call centers to financial analysis.
"It's going to be a sizzling sector," says Vedika
Bhandarkar, head of investment banking at J.P. Morgan
India (JPM ). "There will be more M&A, more
consolidation, more U.S. listings."

FIERCE COMPETITION 
Both multinationals and locals will be jockeying for
position. Even though business is booming, so many
companies have sprung up that pricing competition has
become cutthroat. In all, India has 400 outsourcing
companies, ranging from tiny 25-person shops doing
simple data entry to behemoths such as 13,000-employee
Wipro-Spectramind, the back-office arm of Wipro Ltd.
(WIT ). And their demand for college grads is so great
that half the workers at many outsourcing companies
quit every year to take better jobs. That's driving up
costs: Wipro and Infosys this year boosted wages by
10% to 15% across the board to keep workers from
jumping ship. "Large acquisitive players will see
[M&A] as a means of reducing competition," says
Pradeep Mukherjee, managing director of neoIT.com
Inc., a Bangalore outsourcing advisory firm.

There's likely to be a scramble to gain local
knowledge, too. The outsourcing industry was pioneered
by the Indians, so the most successful shops have been
homegrown. Except for GE and Citibank (C ), foreign
operators came late to the game and have been playing
catch-up. In April, IBM Global Services paid $150
million for New Delhi's Daksh, a call-center operator
with 6,000 workers and customers around the world.
That purchase catapulted IBM (IBM ) into the top ranks
of Indian outsourcing players. Insiders say other U.S.
services firms may seek similar deals. "Like IBM,
Accenture (ACN ) and EDS (EDS ) will look to buy scale
here," predicts K.P. Balaraj, managing director of VC
firm WestBridge Capital. Accenture declined to
comment. EDS says it is more likely to pursue organic
growth.

There's no shortage of potential targets. Insiders say
suitors are talking to 24/7 Customer, a 4,000-person
call-center operator in Bangalore funded by
California's Sequoia Capital. VCustomer, an operator
with about 4,000 employees in Delhi and Pune and
backed by private equity fund Warburg Pincus LLC, is
also a potential target. Neither company would confirm
any takeover talks.

UP FOR GRABS 
It's not just locals that are up for grabs -- as the
GE deal shows. The U.S. giant set up its back-office
operation in India in 1997. Since then the unit, GE
Capital International Services (Gecis), has grown into
a $430 million giant with 17,000 employees in four
countries handling sophisticated processes such as
data modeling and actuarial analysis, in addition to
customer service. Now, though, GE thinks Gecis will
fare better as a semi-independent shop serving a
diverse customer base rather than just GE. So it's
selling off 60% of Gecis to U.S. venture funds General
Atlantic Partners LLC and Oak Hill Partners LLC for
$500 million. "We want to build a global business,"
says Gecis President Pramod Bhasin.

Bankers expect more such sales. Like Gecis, the Indian
call-center and back-office operations of the likes of
American Express (AXP ) and Standard Chartered Bank
may have grown so big and expensive compared with
local players that it no longer makes sense to keep
them in-house. Both have more than 4,000 employees in
India. But because such outfits serve only their
parent, they aren't as hungry and aggressive as
homegrown players. Analysts say the costs of these
so-called captive outsourcing operations are up to 40%
higher than local rivals'. "They will face the same
value-unlocking pressures that GE faced before
deciding to spin off its back-office operation," says
Prasad Baji, vice-president at Bombay boutique
investment bank Edelweiss Capital Ltd.

The purchases aren't just one way. So far most jobs
flowing to India have been relatively low-level
call-center positions. But as India's outsourcers take
on more sophisticated work such as analyzing balance
sheets or managing logistics, they are looking to buy
operations overseas. On Oct. 30, Scandent Group, an
Indian-owned Singapore company with operations in
Bangalore, bought Cambridge Integrated Services Group,
the $230 million back-office arm of Chicago insurer
Aon Corp. (AOC ), for an estimated $175 million. That
makes Scandent the third-largest insurance back-office
outfit in the U.S. While Cambridge will remain a U.S.
company, Scandent plans to list it on the Indian stock
exchange.

Other Indians are on the prowl. A year and a half ago,
Wipro-Spectramind got 2% of its revenues from
processing insurance claims and providing accounting
services. Today the sector represents 15% of the
company's business, so Spectramind plans to
"proactively target that market" and is weighing
acquisitions, says CEO Raman Roy. Computer maker HCL
Technologies Ltd., which gets 65% of its revenues from
call-center-based tech support for the likes of
British Telecom (BTY ), wants to buy a U.S. company
that will add skills such as financial analysis.

There's no shortage of ambition in Bangalore. Although
worries in the U.S. about jobs flowing overseas could
still slow the sector's M&A activity, the possibility
of a serious backlash against outsourcing seems to
have faded with Bush's reelection. So bring on the
dealmakers.


By Manjeet Kripalani in Bombay, with Josey
Puliyenthuruthel in Bangalore





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