MphasiS bails AIG out of captive BPO

Have money, will give business. That is the mantra out there for IT and backoffice service providers which are buying out captive units of global majors, that are either in distress or want to get out of non-core activities, in return for assured future revenue streams.

Leading applications services, remote infrastructure services, BPO and KPO services provider, MphasiS Ltd, a subsidiary of EDS, on Wednesday said it has entered into an agreement to buy out a captive unit of American International Group Inc (AIG), that provides backoffice services to the insurance major out of Chennai and Kolkata.
It did not give out the financials details of the deal stating AIG, which has been its customer since 2006, did not want them to be shared. MphasiS, too, is in the silent period ahead of its quarterly earnings announcement next week.

The move will almost double MphasiS insurance business in terms of headcount from the current 900 odd to 1700 plus once the acquisition is through, Gopinathan Padmanabhan, president Applications Services Business Unit, MphasiS, told DNA Money.

He refused to divulge the duration of the assured business to MphasiS as AIG did not want the details to be discussed. Of its 33,000 plus employees, 18,000 are employed by its BPO unit while the remaining are spread between the infrastructure services unit and the applications services.

The applications business accounts for 60% of MphasiS revenues. As a vertical roughly 37% of the revenues are accounted for by financial services insurance verticals.
Manik Taneja, analyst at brokerage firm Emkay Global Financial Services Ltd, estimated the acquisition should add $30 million to $40 million to MphasiS’s revenues while the deal value, which the company did not reveal, should be in the range of 3-4 times the revenues.

Acquisitions of captives is a trend set by Infosys some two years back when it bought out the backoffice unit of Royal Philips Electronics in a $250 million deal in return for seven years of assured business.

In a similar deal, Tata Consultancy Services Ltd acquired the backoffice unit of Citigroup for $505 million while Wipro followed it in December with the acquisition of a second captive of Citigroup for $127 million. 

Citigroup signed contracts with both TCS and Wipro agreeing to outsource work worth $2.5 billion over 9.5 years and $500 million over six years respectively.

“This is a trend that has come to stay and will continue to look for more such deals,” Padmanabhan said, adding global majors have realised captives are generally 10-20% more expensive in service offerings. They have also realised they should not indulge in an activity that is not core business.

Padmanabhan said. “We are confident AIG will revive and our overall footprint within the global financial major will also increase.”