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K.Venkatasubramanian

TCS has taken the inorganic route to grow its BPO business, with the acquisition of Citigroup Global Services (CGSL).

An assured revenue stream of $2.5 billion spread over 9 and-a-half years from Citigroup, ready access to a talent pool of 12,500, and an opportunity to upsell services to other clients are some key benefits for TCS from this acquisition.

With rigorous process driven operations, Citi’s BPO operation may also help TCS in creating a platform-based BPO delivery model. TCS would be paying $505 million for this takeover. At these levels, the acquisition valued at approximately 1.8 times CGSL’s current year revenues of $278 million.

Citigroup’s decision to hive off its captive BPO is in keeping with the trend of companies such as General Electric’s captive becoming an independent third party BPO – Genpact. Philips Global selling off its BPO to Infosys in 2007 is a more recent case.

Captive BPOs, with their fixed overheads as well as limited ability to deliver enhanced service levels, make a business case for sell-out/transfer to third party BPOs in the present environment.

CGSL has been growing at an annual rate of 27 per cent over the last three years. The company’s operating profit (EBIT) margin of 20 per cent is lower than TCS’ 27 per cent. TCS may now be able cater to other banking clients in addition to Citi by upselling CGSL’s existing portfolio of services. Of course, this would entail standardisation of processes and some client specific customisation, which may be challenge.

TCS is assured of a $2.5-billion revenue flow from Citigroup over 9 years translating to revenues of $263 million annually. BPO operations contribute a little over 6 per cent of TCS’ overall revenues currently; this would go up to over 10 per cent, if the CGSL operations are merged. Transaction-based processing offers scope for better billing rates when compared to voice-based processes and the CGSL acquisition may help TCS strengthen this business.

The takeover may bring a few integration-related issues for TCS. Its BPO operations generated around $320 million in 2007-08 with a 10,000 headcount while CGSL generated $278 million with a 12,000 headcount, suggestive of lower billing rates in the acquired operation. But the cost structure for CGSL may also be lower, given the India-centric delivery model.

The other points of concern are that CGSL acquisition is purely focussed on BFSI and using this for other verticals may not be feasible. Given the global financial turmoil may lead to a realignment of ownership stakes, the continuation of the contract with Citi may not be an absolute given.

However, on the positive side, there is the argument that given the current macro-environment, companies may look more actively at cost cutting and offshore more work. Spends on application development and maintenance services and BPO services, which are not discretionary may have the most to benefit from such a trend.

More Stories on : Mergers & Acquisitions | Outsourcing | Tata Consultancy Services Ltd | Microscope

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