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Tata Consultancy Services acquisition of Citigroups India based captive business process outsourcing BPO arm CitiGlobal Services for USD505 mn is a bold move in these difficult times. When every one seems to be holding on to whatever liquid funds they have, TCS has gone and made an all cash acquisition.
That, however, does not in any way diminish the strategic significance of the deal. CitiGlobal employs over 12,000 backoffice workers that, together with about 8,000 employee strong existing outsourcing operation, makes TCS the second biggest BPO outfit globally.
Scaling up organically to this level would have taken TCS a long time even if so much business was available in these difficult times. Citi has also committed to providing TCS outsourcing business worth USD2.5 billion over the next nine and a half years.
This guaranteed revenue stream somewhat derisks the acquisition. More importantly, it builds a bond between TCS and Citigroup that could yield a greater business engagement subsequently. Besides, through this divestment Citi becomes the first global bank to outsource its entire banking processes, including core operations, to a third party.
This is an important development for the Indian BPO industry, one that could open up the possibility of other global banks also outsourcing banking processes to service providers in India.
The obvious criticism of the acquisition is that at nearly twice CitiGlobal’s expected 2008 revenues of USD278 mn TCS may have paid well above the fair price. But then all acquisitions tend to be expensive on standard valuation measures.
That is because, as against starting a greenfield business, an acquisition brings an established operation and so some premium is built into the price. One can also question the timing of the acquisition. Tatas have acquired CitiGlobal at a time when IT business is seen to be spiralling down and there is concern about growth rates being sustained.
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