A potential sale of back office firm WNS Holdings could trigger consolidation in the business process outsourcing sector as IT services firms, knocked back by the global financial crisis, look to bolster their presence in the growing BPO market.
According to a media report last week, private equity firm Warburg Pincus was looking to sell its 50.12 per cent stake in WNS, a move that would entail a change of control at the Mumbai, India based call-center operator. IT services firms have thrived for years by winning contracts from international clients, helped by a large pool of English-speaking engineering workforce and cheaper wages.
But a downturn in the United States, which accounts for more than half of the sector's export revenue, and turmoil in the global financial sector have halted the scorching pace of growth. "Perhaps because the IT offshore business slowed down in the recession, IT services firms are looking at other areas where they can make some good progress," Brandon Dobell, an analyst with William Blair & Co, said.
While most of the top Indian IT services firms such as Infosys Technologies and Wipro have BPO arms, some of their US based counterparts such as Cognizant Technology Solutions and Affiliated Computer Services Inc could be interested in the sector.
A Cognizant spokesman refused to comment. Even some of the world's largest IT services firms such as IBM and Accenture have forayed into BPO services. In 2004, IBM acquired Daksh to create India's largest BPO firm. Pure-play BPO firms such as WNS and EXLService Holdings, which largely provide services such as insurance claims processing, payroll management and customer support, are seen by analysts as possible takeover targets.
Sykes Enterprises Inc, Genpact Ltd and ICT Group could also be on the takeover radar. "Strategically, it makes some sense. There is a lot of offshoring growth opportunities available in BPO, and lot of budget dollars that could be captured by acquiring one of these BPO players," said Joseph Vafi of Jeffries & Co.
A recent Nasscom-McKenzie report had projected BPO to be a $340 billion-$360 billion market opportunity by 2020. "So, I would look at it as an opportunistic move to expand platforms," said Vafi, adding that companies such as Cognizant and Patni Computer Systems, which do not have a strong BPO platform, could look at BPO firms such as WNS. In an indication of what lies ahead, Philippines-based BPO firm eTelecare Global Solutions Inc and Boston-based Stream Global Services Inc merged late last week to broaden offerings and geographic footprint.
China's leading IT outsourcing firm VanceInfo Technologies is also looking at fresh acquisitions to boost its presence in the backroom operations of the financial industry.Although the financial crisis has robbed the BPO sector of some of its charm, the pace of decline has slowed due to a revival in insurance, mortgage financing, and transactions and claims processing. WNS, whose key areas of operations are utilities and insurance, beat analysts' expectations in its June quarter with a 53 per cent jump in adjusted net income, and said it is seeing a pickup in U.S. sales and expects profitability to improve.
BPO companies enjoy decent valuations as there are not many pure play BPO assets available. IT services companies with critical mass in pure play BPO are also few, analysts said. The improvement in the BPO business and an impressive quarterly performance may help WNS get a good price, Jeffries' Vafi said. WNS shares are up 147 per cent in the last 6 months and have risen almost five fold since touching a year low in March.
WNS shares trade at 12 times forward earnings, compared to the Data Processing & Outsourced Services average of about 16 times. "The recurring revenue of WNS...and its client base are pretty attractive. The IPO of the company was higher than what the stock is currently trading. So, Warburg Pincus could ask for a higher price," said Vafi.
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When WNS responded to the deal chatter, saying the company got expressions of interest on possible change of control, it signaled a revival of deal aspirations for IT services firms, which have long refrained from sizeable acquisitions due to a challenging economy. Improved visibility on customer actions and client budgets should now encourage IT outsourcing firms to get active on acquisitions, William Blair's Dobell said.
"The average CEO or CFO are probably a little bit more open to thinking about making acquisitions or making bigger bets on new business opportunities," he said. "These offshore IT firms have large cash balances that will have to be deployed at some point," said Vafi. Among other BPO stocks, Genpact shares have risen 51 per cent, while shares of ExlService have gained 55 percent of their value in the last six months. Sykes shares have gained 35 per cent during this period.
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