As the global economy goes deeper into recession, there are greater opportunities available for large service providers with cash reserves to scale-up their capabilities. Corporations continue to be under pressure to cut costs, improve liquidity, and divest non-core business functions.
Some organizations are restructuring their businesses by divesting their offshore captive BPO units. Recent deals signify that BPO companies with cash reserves are buying out these units to increase their scale of operations, expand their client base, and to develop multiple delivery centers.
Teleperformance, for instance, a French outsourcing service provider, bought one of Dell’s call centers for Php200 million (approximately US$4 million). With this deal, Teleperformance has expanded its delivery center in the Philippines and bagged a long term contract with Dell.
In another deal, eTelecare Global Solutions bought The Phone House, TalkTalk Group’s contact center in South Africa, for $5.3 million. The contact center will continue to provide services to the TalkTalk Group.
Acquisition highlights
The total number of acquisitions recorded this quarter (Q1 2009 - January to March 2009) was 15, compared to 19 recorded last quarter (Q4 2008 - October to December 2008). The average acquisition size in Q1 2009 was $82.1 million, compared to the last quarter’s $161.4 million. The largest deal recorded this quarter was TriNet’s acquisition of Gevity for $98 million.
Large cash-rich BPO companies keen to geographically expand their delivery center capabilities will be on the look out for acquisitions, and there is a possibility that we will see a lot more such deals in the next few quarters.
Jan-Mar
2009 (This Quarter)
Oct-Dec
2008 (Last Quarter)
Number
of deals
15
19
Average
value of deal
USD
82.1 m
USD
161.4 m
Largest
deals
TriNet
acquired Gevity HR Inc for $98 m. Gevity is an HRO service
provider with 675 employees. The number of employees to be
retained by the new entity has not been disclosed.
ACS
acquired e-Services Group for $85m.
e-Services specializes in
BPO services. ACS will retain 4,000 employees of the e-Services
Group based in Jamaica and St. Lucia.
TCS
acquired Citigroup GS for $512 m. CGSL’s 12,500 employees will
be part of TCS.
EGS
Acquisition Co. acquired eTelecare Global Solutions for $290 m.
The management team and 13,000 employees will be part of the EGS
Acquisition Company.
Sources: ValueNotes Outsourcing Dealtracker
M&A by location of target company
The Q1 2009 quarter saw a significant change in the location of the companies acquired when compared to the last quarter, which saw the majority of the acquired companies based in Asia. Service providers are keen to expand their geographical presence and have centers in multiple offshore locations. The majority of the companies acquired this quarter are from the US (58%) as compared to 32% in Q4 2008.
Most corporates in the U.S. have been under tremendous financial pressure over the last couple of months. Given the current scenario of liquidity crunch in the market, availability of quick cash is an appealing proposition for companies looking to sell out. On the other hand, for the acquiring companies, again the key factor is valuation - the value is what makes a buy out attractive!
Source: ValueNotes Research
Overview of the BPo / KPo contracts in Q1 2009
Outsourcing activity fell this quarter (January to March 2009), compared to the previous quarter of Q4 2008. The total number of BPO/KPO contracts recorded in Q1 2009 was 63, compared to 79 in the last quarter. The number of contracts signed in the earlier quarters was 83 in Q3 2008, 58 in Q2 2008 and 78 in Q1 2008. The total value of contracts (publicly declared) was $19.6 billion in Q1 2009, around 80% higher than $3.8 billion in the last quarter. This increase was primarily due to a $17.5 billion deal signed in February 2009 between the US Army and CIBER Inc. If this deal is not included, there was a 6.5% fall in the total value of contracts for this quarter as compared to the last quarter.
Average contract value and tenure (declared) for Q1 2009
Total number of deals
Total size of deals
($ billion)
Average Value
($ million)
Average tenure
January 2009
21
1.3
211.4
5.3
February 2009
27
18.2
2,597.7*
4.4
March 2009
15
0.2
60.4
4.4
Total (Q1 2009)
63
19.6
956.5*
4.7
Source: ValueNotes Outsourcing DealTracker
Note: * includes the $17.5b deal signed between the US Army and CIBER Inc
Shorter contracts were the flavour of Q1 2009
There was a significant increase in the number of deals with tenure of 1 to 5 years - 42% in Q1 2009, compared to 28% in Q4 2008. The number of contracts that were for 5 years or more dropped from 72% last quarter to 58% this quarter. Given the unstable economic situation, corporations are reluctant to commit to long-term outsourcing contracts.
Source: ValueNotes Research
Note: Only deals where tenure data was available habve been analyzed
Contracts by services
The number of finance and accounting contracts increased from 14% in Q4 2008 to 26% in Q1 2009. We believe that this is due to the fact that banks and financial institutions are divesting their captives and outsourcing their requirements to the buyer. Moreover, companies in other verticals such as healthcare, telecom, insurance, manufacturing, etc. are increasingly outsourcing their ‘non-core F&A’ activities.
Source: ValueNotes Research
“Other services”, which include specialist services like medical transcription, transaction processing and supply chain services, saw a 50% growth when compared to the previous quarter. The number of knowledge services contracts, mainly consisting of publishing, research & analytics, engineering and e-learning, fell to 6% in Q1 2009, compared to 15% in Q4 2008.
