07 Dec 11 BPO M&A activity_Warming up to growth

The business process outsourcing industry has evolved rapidly over the past few years. Also, with organic growth drying up due to the global financial crisis, companies are looking to inorganic avenues to jump-start growth. Typically, acquirers are companies that are flush with funds, have an aggressive growth and globalization strategy. The reasons for this increase in M&A are diverse and can be either one or more of the following –

Forces driving M&A

Source: ValueNotes Research

Each of these listed drivers stem from a need to achieve scale and customer access. In an increasingly commoditized business, the largest players will take a disproportionate share and nobody wants to be left out. As businesses find that adopting an M&A approach can help scale quickly, we can see increased transactions, and this is despite an economic slowdown. If anything, the recent economic crises have fueled M&A’s, as lower valuations are in fact a big driver for the current spurt.

In some cases where companies were looking to venture onshore, the valuation of a target company crumbling under the prevailing economic scenario has been especially attractive. Though inorganic growth is riddled with challenges of an acquired entity being a misfit, regulatory issues, financial misdemeanors, etc., it continues to be a crucial aspect of every company’s growth strategy.

M&As in 2011 indicate aggressive growth plans
In the run up to the last quarter of 2011, the outsourcing industry has witnessed many acquisitions – some expected others not so. The other aspect that has made news, including over the last nine months, is the spate of multiple acquisitions by companies. Following an extremely aggressive plan, which relies a lot on inorganic growth, many companies acquired multiple targets in a single year. The following table captures some of the deals and accruing benefits:

Multiple acquisitions by companies

Company Target Rational behind the acuisition
EXL Services
Outsource Partners International
  • Will propel the company’s growth in the finance and accounting (F&A) section
  • Expansion of delivery to Bulgaria that in turn is likely to enhance success in Europe
  • Top management of the acquired firm retained adding to domain expertise
  • This KPMG captive likely to enhance adoption of industry best practices
  • Enabled access to a very specialized service in the insurance industry – subrogation services for property and casualty insurers
  • Acquisition of a captive from a client in insurance industry (Hartford Financial Services Group) and retention of most of the staff and leadership will add to domain knowledge
  • Expected to complement its insurance business, already a major source of revenue
  • Managed to gain some large clients as a result of this deal such as such as Sky, Tesco and Google
  • Enabled expansion of clientele beyond its earlier focus on public sector
  • Allowed expansion of delivery in India
Call Center Technology
  • Complement to earlier acquisitions as it provided services to companies like First Assist and Capita Secure Information Systems
  • Value-addition with a provision of hosted ICT for contact centers
  • Services such as voice, email, text messaging, web chat, social media complement recent acquisition of Technophobia, developer of next generation web applications
  • Increase in workforce by approx. 1600, mostly located onsite
  • Many new clients across public and private sectors
  • Addition of high growth verticals – such as retail, utilities, logistics and transportation, travel and leisure and media and telecom, utilities
  • Vertex also recently acquired Shell Transource, one of the largest domestic BPO companies in India
  • Enabled high-end capital markets domain and technology expertise
  • Enabled consulting and IT services with a specialized focus in capital markets and healthcare
  • Gained nine of the world’s top ten investment banks and three of the top five asset managers as clients
  • Many onsite employees servicing clients in the UK, US and Japan
  • Retention of top management and ~3500 employees will add to domain expertise
EmPower Research
  • Added considerable expertise and intellectual property to the Smart Decision Services business, comprising analytics, research, reengineering and risk management services
  • Gained large clients in pharmaceutical companies, PR agencies, technology firms, and consumer packaged goods (CPG)
  • Gained access to multiple facilities across the US, UK and India
High Performance Partners
  • Gained access to the Quantum software platform to support its Mortgage Business Process as a Service (BPaaS) offering
  • Enhanced the value of company’s acquisitions of the Headstrong and EmPower research earlier this year
  • Enhances product portfolio for their area of focus – banking
Xerox (ACS)
XL World
  • Helped enhance business in Europe
  • Helped achieve goal of creating a global network of outsourcing centers
  • Increased penetration in the telecom vertical
  • Extend delivery to Italy, Albania and Romania
Innova Consulting
  • Gained clients in Europe
  • Gained delivery centers in Europe (Italy)
  • Expand services to customers in the BFSI sector


Source: ValueNotes Research

Multiple acquisitions are not a completely new phenomenon – Aegis has acquired more than 15 companies in five years. There is a two-fold strategy behind these acquisitions, verticalization of solutions and tapping new geographies.

Acquisitions aim to scale up capabilities and reach
As discussed in the table, most of the companies going the M&A way intended to enhance their current capabilities and markets. However some instances such as Genpact’s acquisition of EmPower Research and Headstrong and Xerox (ACS) acquiring Innova Consulting indicate decisions that were based on the anticipated market demands. A couple of trends that are likely to continue in the upcoming quarters include:

  •   Acquisition of captives – Companies continue to divest their holding in captives. The reasons may vary from growing confidence in third party service providers to their strategy to focus on core offerings. Captives are usually a good buy as they come with the promise of a large account from the parent company. The economic downturn is forcing the companies in the West to relook at every cost center and we can expect more acquisitions of captives by the service providers. For those that already have a presence in the relevant verticals, benefit from access to industry best practices, increase in scale of services and increase in reach.
  •   Focus on high growth verticals is apparent – Verticals such as BFSI, healthcare, retail are areas of high growth. Service providers are looking to expand presence in these verticals by enhancing offerings portfolio with inclusion of end-to-end services and products. Multiple small acquisitions in the same vertical help with each new target bringing in its domain knowledge and enhancing services with value added offerings or technology.
  •   Europe is the next focus market – While US will continue to be largest market given its untapped potential, recent economic developments have forced companies in Europe to explore the option of outsourcing, more than ever before. The service vendors are proactive in providing buyers in Europe with delivery centers in countries such as Bulgaria, Italy, etc. Fast expansion in multiple onshore locations ensures better client confidence.

Fast scaling up of clients needed to sustain multiple acquisitions
Acquisitions come with their own set of problems. All M&As are successful in different measures, with some being complete failures. Parameters to ensure success, is a topic that experts have long discussed and debated.>/p>

An important aspect is that after a successful merger, what a company requires most is a client pipeline that matches its increase in capabilities. Renewed efforts are needed to retain the confidence of existing clients of both parties, who are wary of the change and its effects. Post quick, successive mergers this need only multiplies manifold. The other aspect is addition of new clients, which is essential to sustain the increase in scale. Especially in case of new verticals and new geographies where the sales cycle may continue to take as much time, or even more. So while companies continue to make the most of this opportunity they must be cognizant of the immediate need of an altered and improved go-to-market strategy. Extreme caution is a given, though one has to admit, industry watchers follow Aegis and Infosys with equal interest – given that they are at opposing ends of a spectrum.

However, in all probability, we should expect the M&A trend to continue with an increased focus on M&As as firms seek to expand services to clients and reach newer markets. Right now, there are many companies willing to sell, and at (these lower than usual) prices it’s a bonanza for cash rich firms looking for the opportune moment to buy.

Blog,BPO/KPO Services
ValueNotes Research
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