Big Fish on the Prowl

Tell him about the street talk regarding AT&T’s interest in his
company, and the reaction is sharp and swift. "This is a white lie, there’s
absolutely no truth in this," retorts Rakesh Kumar, CEO of Global Vantedge
in Gurgaon, to speculation of his company being a target for acquisition.

While sources insist that a deal has already been concluded, Kumar refuses to
comment. But he does admit that Indian independent third-party BPOs like Global
Vantedge, vCustomer and 24/7customer are all fast becoming attractive targets
for big companies in IT services and other businesses.

Indeed, the recent IBM-Daksh deal could only be the first one in a series of
M&As soon to be witnessed in Indian BPO industry, if sources are to be
believed. Apparently many other global majors are eyeing medium to large sized
independent BPOs for possible acquisitions. A recent Financial Times report
quoted bankers involved in IBM-Daksh deal as saying that two more new deals
could well suggest that the biggest names in corporate America are becoming more
aggressive in off shoring.

Neelesh Hundekari of KPMG concurs: "Some of our large overseas clients
are actively looking for possible acquisitions in Indian BPO industry."

But why this newfound interest in Indian BPOs? The answer clearly lies in IBM’s
acquisition itself. "Many Indian companies, including Daksh, have grown
from scratch and built a wonderful process outsourcing ecosystem, from
infrastructure to recruitment and training, while simultaneously building
industry’s best practices around these functions. As a result, they become
very attractive for a client like IBM who is saved from all the time and effort
it takes to reach that level and scale," says Hundekari. With Daksh, IBM
has now has a foundation to offer services to any of its clients worldwide,
apart from access to Daksh’s capabilities. "It does make sense for IT
companies to acquire to gain speed to market," says 24/7 Customer CEO PV
Kannan.

Besides, "capabilities in BPO are increasingly becoming a must-have for
global IT services firms, who otherwise have had little business servicing IT
clients out of their ventures in India", says BPO analyst Bhavtosh Vajpayee
of CLSA. Acquiring BPO companies is the easiest way to earn back-office
capabilities. "IBM will eventually have Daksh as its backend," says
Vajpayee.

Now that a precedent has been set, there is little to hold back other global
IT services giants–the likes of HP, CSC and EDS–to beef up their own BPO
capabilities in India.

Looking for Suitors?

While closed-door M&A parleys by several leading independent Indian BPOs
are believed to have taken place, an industry analyst insists that "only
those who have gone through second or third round of funding from VCs would
become primary targets".

Based on this criteria, companies like vCustomer and EXL Service of Noida,
Global Vantedge of Gurgaon and 24/7 Customer of Bangalore seem to fit the bill.
"Whether a company is going to get acquired depends on what stage of VC
funding it is, and the degree of control exercised by the VC," says Sujit
Bakshi, president India and global head of operation, vCustomer. Is vCustomer
open to the idea of an M&A? "No we aren’t. We do not need cash, our
balance sheet is healthy and we are getting customers."

But for companies who are not getting enough customers, or want to cover a
larger market, getting married to a larger partner is going to be the only
option. "Players like 24/7 Customer can stay independent…at the same time
they can always partner with IT companies to cover the market space,"
Kannan says. Kumar of Global Vantedge agrees. "There is no rush at the
moment, although it is a matter of time. Whether independent pure-plays survive
or not depends on the strategy they adopt," says Kumar.

Goodbye, Lone Rangers

Life for independent pure-play BPOs is bound to get tougher post the entry
of giants in the arena. Competing for customer contracts against giants like IBM
and Accenture is not the best way to do business, as these BPOs are bound to
find out sooner than later. "This (IBM-Daksh) deal means that BPOs need to
be part of a bigger outfit," said Ravi Ramu, CFO of Mphasis BFL, which has
a fast-growing back-office unit, MsourcE.

However, others dismiss the idea. "It (IBM-Daksh deal) does not mean
pure plays cannot exist. In the US, while players like EDS and Accenture have an
IT/ITES mix, companies like Convergys and others have thrived," says Kannan.
"The reason is companies like IBM, EDS and Accenture play in the $100
million to $1billion mark deals… companies like 24/7 Customer do not play in
the same level of revenues and we are quite happy to chase $5-20M in annual
revenues."

But then analysts are already defining future rules of the game–customers
will increasingly look to go to one-stop shops that can offer both IT-related
and IT-enabled outsourced services. The industry is already showing signs of
moving towards integrated services offering, first witnessed through Wipro’s
acquisition of Spectramind a couple of years back.

Testing New Waters

According to Hundekari, there are other, specialized opportunities for
industry to look at, which also make use of India’s core advantage in an
abundant and highly educated workforce. "For example, HR outsourcing is a
big growth area in BPO, but there are no big players offering any services in
this field, anything more than basic payroll services," he says. Similarly
there are opportunities possible in fields like instructional design, CAD/CAM,
knowledge management and more.

"Specialized or not, every VC funded company is going to be a target for
acquisition. "Venture capitalists will look for exit all the time, that is
fundamental to their business model," says Kumar, who himself is funded by
Chrysalis Capital.

Take HP, a big client at Daksh–if it does indeed pull out of Daksh
post-acquisition, as it is tipped to be, it may as well begin looking for
acquiring its own BPO outfit. Then there is additional speculation about telecom
giants, (including our very own Bharti), looking to enter the industry through
acquisitions route. The action is probably just about to heat up in the
industry, as the list of contenders for buying Indian BPOs grows bigger.

Rishi Seth in New Delhi