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Widening the Spectrum

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DQI Bureau
New Update

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.

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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.

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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

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