M&A buzz around BPOs gets louder

First WNS, then Genpact, and now there's speculation around private equity's stake sale in EXL. Over the past few quarters, pure play offshore BPOs have been in the media spotlight with reports hinting at stake sale by large investors or PE funds.

Even as companies that have been named as acquisition targets have either denied such possibilities or stuck to the standard “no comment” policy, Business Line caught up with industry experts to get their reading of the market buzz. Do they dismiss it as mere speculation, the usual PE investment-exit cycle, or is it a resurrection of the debate on the success or failure of the pure play model (that is, companies offering only BPO services, as opposed to integrated IT-BPO players offering a gamut of services)?

“I think it is more about speculation and investment horizon of PEs and less to do with performance of a sector or even integrated versus pure play BPO debate,” says Mr Sid Pai, Managing Director of outsourcing advisory company, TPI in India. “Theoretically, it is rare for PE firms to stay invested in companies for very long, and so naturally, when there is a recovery in valuations they may mull an exit,” he says.

His comments resonate with the views of Mr Nikhil Rajpal, Partner, Everest Group, who said, “I do not think it reflects any preference for an integrated approach at all. From an industry point of view, in companies where PE firms are invested in, there is generally an investment lifecycle. So 5-8 years is, typically, seen as a right maturity time for them to exit or cash out.”

However, from the point of view of potential buyer, scale would be key driver for acquisitions, as the trend of vendor consolidation nudges players into seeking scale advantage.

The WNS Group CEO, Mr Keshav R. Murugesh, categorically states that while investors always retain the freedom “to do what they want”, PE firm Warburg after an 18-month transparent process (to evaluate options) had decided against selling, to focus on growth. “At WNS, our focus now is growing business and valuation,” he says.

Pure play model

Mr Murugesh also asserts that there is a significant potential for the pure-play BPO model.

“I can't comment on other companies but, broadly, exit by PEs, if at all, should be seen in the context of the nature of PE investment where funds may look for liquidity. And even then there is someone looking to buy, right?…It shows that despite the short-term sluggishness compared to IT services, the BPO business is solid in the long term, given its ability to help clients reduce costs and remain competitive,” he says.

Rejecting the integrated versus pure play argument, he says that the buyers in the market for IT and BPO services are a different set. “We have gone for a vertical approach where we have people with deep domain knowledge, speaking to clients. As opposed to that there are integrated players, predominantly IT players for whom BPO is just a fraction of the business,” he quips.

But Mr Sudin Apte, CEO of advisory firm Offshore Insights, feels that BPO arms of IT companies have advantage of driving majority revenues from transaction processing and platform related services.

“While this can be an advantage in further mining a customer, we have not seen many a BPO deal getting bundled with an Application Development or Infrastructure Management deals. These are separate engagements which come under separate budget heads,” Mr Apte says.

Mr Bhavesh Shah, Executive Director at JM Financial, points out that most PE players look at a five-year horizon for exiting their investments. However, their calculations went awry because of the recession of 2008; now with valuations looking up some may be back on the deal table.

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