With IT+BPO rivals gaining, Genpact goes for a buyout

Genpact Ltd, the New York Stock Exchange-listed business process outsourcing (BPO) firm, said on Wednesday that it intends to acquire information technology (IT) services firm Headstrong Corp, led by HCL co-founder Arjun Malhotra, for $550 million.

The acquisition, to be completed by May 31, 2011, and funded through internal accruals and debt, may be an indication of pure-play BPO firms such as Genpact trying to fend off competition from larger technology vendors such as Tata Consultancy Services and Infosys Technologies that offer both IT and BPO service as a bundled offer.

“Headstrong is a complementary high-growth business ... that is an excellent fit strategically, financially, operationally and culturally,” Pramod Bhasin, Genpact chief executive said. “With this acquisition, we are gaining critical domain and technology expertise in the complex, but highly attractive, capital markets industry vertical.”

Genpact, originally set up in 1997 as the Indian back office arm of GE Capital, had a little over $400 million cash on its books at the end of 2010. GE continues to be the largest client for Genpact, contributing over 35% to its revenues.

Genpact employs about 44,000 people and had revenues of $1.3 billion in 2010.

Headstrong offers services to firms that operate in the capital markets and counts Goldman Sachs and Merrill Lynch among clients.

Genpact expects Headstrong to grow at 20% a year in the long-term.

Headstrong is headed by HCL co-founder Arjun Malhotra, whose second IT entrepreneurial venture TechSpan merged with Headstrong in 2003. The firm employs around 3,700 employees in seven countries and had revenues of $217 million in 2010.
Headstrong chief executive Sandeep Sahai and his management team will lead Genpact’s capital markets industry vertical.

Interestingly, last September, speaking at an Deutsche Bank organised investor conference, Genpact’s executive vice-president for sales and marketing at Genpact, had said that while the merger of an IT firm and BPO firm is theoretically attractive, he was yet to see one in practice.

Analysts see the move as a natural evolution for Genpact, given the certain critical mass it has attained in terms of revenue.
“Once service firms in this industry reach a certain size, it becomes imperative for them to have a full service provider as clients would want to source more service from the same vendor where possible,” said Sid Pai, managing director at the Indian arm of outsourcing consultancy TPI. “In the earlier wave, it was IT service firms acquiring BPO firms, be it IBM acquiring Daksh,

Wipro acquiring Spectramind or Infosys acquiring Citi BPO.”
Citigroup Global Markets Inc and UBS Securities Llc acted as the financial advisors to Genpact while Morgan Stanley & Co. Inc acted as the exclusive financial advisor to Headstrong in this transaction.