TCS rides to the Citi

As a fallout of the global financial crisis, the healthy subsidiaries of leading financial services companies seem to have become easy pickings. Last fortnight, India’s largest IT services company Tata Consultancy Services (TCS) acquired Citigroup’s BPO arm Citigroup Global Services (CGSL) for $505 million (Rs 2,424 crore) in an all-cash deal. As part of the deal, TCS will get assured revenues from Citi of $2.5 billion (Rs 12,000 crore) spread over a period of nine-and-ahalf years. It also brings more than 12,000 BPO employees on the TCS rolls making it the second-largest BPO player after Genpact.

“The acquisition of CGSL offers several strategic benefits to TCS. One, it gives us the ability to offer an end-to-end, domain-led solution for business operations of large financial services institutions. It also positions us well to create banking processing platforms by integrating our products and process capabilities,” says N. Chandrasekaran, COO, TCS.

The deal may be TCS’s first step towards becoming a major banking services BPO player. “TCS will build on the CGSL platform and provide platform-based BPO services to new clients, making it a major player in the banking sector-specific BPO arena,” says London-based Rachael Stormonth, Vice President, Nelson-Hall, a leading BPO analyst firm.

“The deal will also help us to penetrate Citigroup further,” says Chandrasekaran. But given the current financial health of large global institutions, that may prove to be a double-edged sword. “TCS’s revenue contribution from Citi will likely increase to 5 per cent plus with a revenue size of $400 million (Rs 1,920 crore) from the current $150 million (Rs 720 crore).
Besides, TCS’s exposure to BFSI (banking, financial services and insurance) will increase to 46 per cent from the current 44 per cent, especially when the turmoil in financial services is worse than other verticals,” says an ICICI Securities report on TCS’S acquisition of CGSL. Analysts like Stormonth believe that TCS is wellpoised to handle an acquisition of this scale given its past experience in acquiring BPO operations in the financial space. Its earlier acquisitions include Chile-based Comicrom ($23 million) and UK-based Pearl Group (over $800 million).

More captives up for sale Morgan Stanley Advantage Services (MSAS): Morgan Stanley’s Mumbaibased captive arm, which employs close to 2,000 people, is reportedly up for sale despite the company’s denial in February 2008. InfoVision Group: With over 10,500 employees and a major presence in HR BPO, the company has been in the business for over 15 years. Lehman’s BPO arm: Nomura is supposedly sealing the final terms to acquire Lehman’s 2,500-strong BPO operations. Citigroup Information Technology Operations and Solutions (CITOS): Citigroup’s technology hub in India plays a critical role in technology development, deployment and technology infrastructure support globally.

What’s interesting is the impending sale of captives of leading but beleaguered financial institutions. Analysts say many of these captives may soon be up for “fire sale”. They point out that CGSL was valued at $700 million less than a year and-a-half ago. Stormonth also says that captive operations of Citigroup Information Technology Operations & Solutions, Morgan Stanley Advantage Services (despite the company’s denial early this year) and the InfoVision Group and Lehman Brothers’ BPO arm are either already on the block or are being considered for sale.

“Some of the global financial institutions will want to focus on their core strengths and markets given their financial shape now. And they might want to sell their captives in India or the Philippines. But the point is, despite the large Indian players having huge cash reserves, would they want to buy these captive arms or just focus on organic growth like they always have?” asks the head of a leading global IT analyst firm.

Advantage TCS
The company gains on several fronts from the Citi acquisition.
• Becomes the second-largest BPO player in the country after Genpact
• Gets assured revenues of $2.5 billion over 10 years
• The deal will help TCS become a major banking services BPO player