Widening the Spectrum

Market gurus have hailed the recent acquisition of Spectramind eServices by
Wipro as a brilliant strategic move. The dotted line was signed only after Wipro
shelled out $93 million despite an initial evaluation of $45 million.
Post-acquisition, Wipro holds a 90% stake in Spectramind, while HDFC has a small
chunk of the remaining 10% and the rest is made up of unvested employee stock
options. The move is expected to help position Wipro as a global provider of BPO
solutions.

The need to substantially increase ROCE (return on capital invested) was the
compelling reason for Wipro to increase its stake in the company. But Wipro
expects to see the results of this strategic move only in FY 2004. This
assumption is based on the management estimates of steady net margins of 18-23%
as per the current revenue growth trajectory for Spectramind. Considering this,
would the setting up of a new BPO unit like Infosys’ Progeon, been a more cost
effective option for Wipro? Wipro used the gestation period between October 2001
and July 2002 to decide against ‘build’ in favor of ‘buy’. The company
contends that the one pressing factor was the need for speed, which made it go
for the buying option. Also customers preferred Wipro buying stakes in a single
entity rather than an alliance.

Surprisingly,
one of the major arguments in favor of the deal has been that Spectramind would
bring alongwith it, a fair share of industry stalwarts in to the Wipro fold. The
big names that come with Spectramind are Dell, American Express, GE Caps, and
British Telecom. But given Wipro’s brand value in the industry, the company
would have eventually been able to attract these names too. So the mathematics
behind the acquisition does seem a little fuzzy!

Interestingly, going against industry tradition, Wipro has paid over twice
the estimated turnover of $45 million to bag the deal. Infact the only factor
that seems to justify this deal is the P/E (price/earning) ratio. At a valuation
of $125 million and an estimated PAT (profit after tax) of $10 million,
Spectramind’s P/E stands at 12.5, while Wipro’s is at 31.6, thereby making
this a fair buy in P/E terms.

Wipro foresees a three-stage value addition in its BPO efforts. The company
intends to improve cost efficiencies by moving its operations offshore. The
second stage warrants improved efficiencies and continuous process improvements
by using Six Sigma tools. The final stage includes process optimization and
re-engineering by redesigning the process and changing the IT solution that
supports the process. The company intends to serve its overseas clients by
adhering to the same quality standards using Six Sigma, and COPC.

With this deal falling through, one realizes that consolidation seems to be
the buzzword in the relatively young IT Enabled Services (ITeS) segment.
Mid-rung software companies like NIIT, Nucleus Software, and Polaris are hunting
for viable deals in the segment. Software companies have approached a few
players in this space like FirstRing, Epicenter, and TransWorks. Call center
player Daksh eServices is also on the lookout for good buy-out deals to
penetrate new segments and geographies.

As per the Nasscom-McKinsey report, the ITeS sector in India is projected to
grow to $21-24 billion in 2008. Some of the well-managed centers with nearly 100
agents and companies in specialized businesses have the critical mass to trigger
consolidation. Nasscom forecasts consolidation in this space for the next 12
months with target ITeS companies being players focused on processes like
insurance claim processing, HR, etc. With even Cognizant Technology Solutions
all set to make a mark in the ITeS segment, the bundling of IT services and BPO
contracts seems to be the trend of the future.

BPO is a key strategic initiative for Wipro and is expected to be a major
growth driver. And with India gearing to be the destination of choice in the
IT-enabled services segment, Wipro’s acquisition is a step in the right
direction.

Dhanya Krishnakumar In New Delhi