Not long ago, BPO vendors, especially the larger players such as Genpact, WNS, IBM, etc. were on an acquisition spree, aggressively chasing organic growth. However, with the current global financial crisis, and slowdown in the US economy, companies are wary.

However, the recent TCS-CGSL deal has brought a much-needed cheer to the industry Of course there have been mixed reactions from the industry. TCS acquired Citigroup's captive arm CGSL (CitiGlobal Services Ltd) for $505 m. With this acquisition, TCS BPO has become one of the frontrunners in the BPO industry and Citigroup has got liquidity at a time when the global economy is under tremendous pressure, battling the financial crisis.

Impact on the Acquirer

We believe that the acquisition of CGSL is a good buy for TCS as the valuation is approximately 2 times the revenues of CGSL. The company was earlier valued at 4 times its revenues. Along with the deal, TCS has also acquired an attractive 9 year contract worth $2.5 b from Citigroup. CGSL has an employee strength of over 11,000 in India and TCS BPO has a total of around 8,000 employees.

CGSL provides call center and transaction processing services in areas such as capital markets, mortgage, retail banking, finance and accounts. CGSL's strong processing capabilities in the banking industry will benefit TCS in developing and improving their own processes and capabilities. An opportunity to leverage the CGSL knowledge of processes will enable TCS to pitch for a wider banking clientele.

Impact of the target company

Given the current global financial crisis, this deal will benefit Citigroup. Like most companies in the banking and financial sector, Citigroup has also been under tremendous financial pressure over the last couple of months. The company lost about $17.4 b in the last three quarters. The sale gives the company not only access to liquid funds but also relieves it of the increasing burden of running an offshore captive operation.

Going Forward

Captive centers offer significant economies of scale and competitive advantage for companies with very large volume of work to be transferred offshore. However, several factors are influencing captives to sell out their businesses.

• Setting up of a captive center, the related infrastructure and manpower management involves significant top management interest and financial outlay. Cost structures at many captives are not comparable - as they are not in a competitive environment, while third party vendors constantly figure out ways to reduce costs/increase efficiencies.
• Most of the large third party vendors today have developed capabilities to handle standard processes and there are several credible vendors available. Hence, the companies can focus on their core business.
• Captives are faced with similar problems of attrition, rising wage costs, etc., and moving work to third party vendors helps reduce this. Further, third party vendors have the benefit of even larger scale and constant learning from multiple client engagements.
• Finally another key factor is valuation - the value is what makes a sell off attractive. Given the current scenario where everybody is looking for liquidity in the market, availability of quick cash is an attractive proposition.