India’s largest outsourcing provider Tata Consultancy Services (TCS) acquired Citigroup Global Services Limited (CGSL) last week for an all cash consideration of approximately $505 million (subject to closing adjustments). In addition, Citi will pay TCS $2.5 billion over 9.5 years for the ongoing provision of business process outsourcing (BPO) services. The agreement builds upon the existing relationship between Citi and TCS, whereby TCS provides application development, infrastructure support, helpdesk, and other process outsourcing services to Citi.
CGSL is a large provider of BPO services within the banking and financial services sector, providing end-to-end process management across the sector and an array of services to Citi’s consumer, corporate and global wealth management businesses worldwide. CGSL has over 12,000 employees located in India and expects to generate revenues of approximately $278 million in 2008.
The current turmoil in the very sector that CGSL serves may have helped this deal along as, like many organizations, Citigroup has been hit by the sub-prime crisis in the US. However, TCS is in acquisition mode, having acquired UK-based Pearl Group’s life and pensions operations in 2006. The deal involved the transfer of existing non-IT Pearl staff to TCS, and was the first outsourcing uptake of its kind in the UK. It was also recently reported in a German newspaper that TCS is planning to acquire Munich-based Siemens’ IT Solutions and Services (SIS) unit, with the view that the India-based outsourcing providers are looking to reduce their dependence on the US and take on more acquisitive business in other regions, including Europe.
The deal with CGSL is very similar to that made with Pearl, but about 10 times the size in terms of the number of staff involved. Moreover, this deal has a higher profile because it is the largest buyout of a foreign BPO captive in India.
In Butler Group’s opinion, this is another important milestone passed on the hill-climb of the top Indian BPO vendors. It is only a matter of time before new deals are announced, and the desire to take reliance away from the US market and increase business elsewhere means that providers serving European organizations could well be acquisition targets. Furthermore, given the fact that one of the main sectors using BPO services is the financial sector, and that the world banking crisis appears not yet to be at its lowest point, there may well be some rich pickings for overseas service providers which want to acquire similar organizations that are currently finding the going tough.