U.S. slowdown puts BPO buyouts on fast track
By siliconindia   |   Friday, 18 April 2008, 02:34 IST
Printer Print Email Email
Mumbai: According to industry players and investment bankers, the U.S. slowdown is pushing more third-party outsourcing firms and captive operations to sell out, reported The Economic Times. Unlike in the past six months, large third-party BPO firms and integrated IT and BPO players are now keen on using their cash reserves to scale up their operations, while potential targets that were holding out hoping for a recovery in their valuations are now interested in exiting before further value erosion happens. "Many of the smaller players that are unable to scale up are now looking to sell out. Some of the investors in these companies were planning to exit through IPOs but given the market conditions they cannot go to public now. Many multinationals with captive back office operations of less than 5,000 people are also in the market," said one large IT and BPO player. "Firms that were valued at 2.5 times their revenues are now seeing their valuations at 1.5 times their revenues. We also see multinationals doing carve-outs of some of their functions," said Milan Sheth, partner, Ernst & Young. The recent acquisition of RSM McGladrey's captive operations by Quatrro BPO is one such instance of a third party BPO acquiring the captive unit of a U.S. company hit by mortgage woes. RSM McGladrey's parent, H&R Block, was hurt by troubles to its mortgage arm, Option One, and only recently managed to conclude its sale to Willbur Ross after an earlier attempt to sell it to Cerebrus Capital Management failed. Option One, which also had a captive operation in Pune, has now nearly shut down. The captive used to employ close to 800 people at one time, said a former employee. The number had dwindled to 300 and has now reportedly closed. Option One in the US had also laid off 600 employees globally. "Because of the recession, some of the sell-off decisions have been advanced. Unless you?ve made significant investments in the captive, you won't be able to make them profitable. And people are shy of making investments now," said Abizer Diwanji, executive director, KPMG. "We're getting at least one deal a day. Many of them are captives based in India and some of them are third-party BPO firms in the U.S.," said one BPO executive who did not want to be named. Even BPO firms, which haven't been very aggressive with acquisitions, are now drawing up fairly aggressive acquisition-led growth plans.

siliconindia