Genpact buyout jinx – Outlook Business India
SOURCE: Business Outlook India
DATE: Dec 2009
It is the country’s largest pure-play BPO. It earned revenues in excess of $1 billion in 2008. It has 37,000 employees spread across 13 countries. With a CV like that, you’d think Genpact would be considered the perfect match by lesser BPO companies looking to be acquired. Yet, that’s not been the case. In deal after deal, it has failed to breast the tape first. It has, quite simply, been the perpetual bridesmaid.
Consider the facts: in the last two years, Genpact has been among the frontrunners in at least half a dozen small- and big-ticket M&A (merger & acquisition) deals. However, it has fallen short on almost every occasion. The last time it really tasted success was when it bought out its erstwhile parent GE Money’s captive 700-seater centre in Guatemala City, in August 2008. It had also made a couple of similar buyouts in the financial services and risk-management space earlier. But all these deals were worth less than $50 million.
In 2008, TCS beat Genpact, buying Citigroup’s BPO for $512 million. In October ’09, Cognizant pipped it, buying a UBS unit for $75 million.
Genpact’s M&A record has otherwise been rather disappointing, at least with regard to big-ticket deals. In 2008, TCS pipped it to the post, picking up Citigroup’s captive BPO for $512 million; in October this year, Cognizant outsmarted it to gobble UBS’s Hyderabad unit for $75 million. A month earlier, Genpact had come close to picking up something; it was on the verge of buying private equity firm Warburg Pincus’ 50% stake in WNS Global Services. But the latter decided to postpone the sale. Genpact seems to be jinxed.
“Jinx? I did not know one existed,” says Pramod Bhasin, Genpact’s President & CEO, trying to sound nonchalant. “Actually we haven’t tried that hard.” To be fair, he’s been hobbled by some bad luck, and sometimes, a smaller pocket. For instance, with the Citi BPO bid, it wasn’t even a close finish. “You can’t say that Genpact lost to TCS,” says a senior executive in a rival company that was also part of the bid. “The price that TCS paid was far higher than what any of the other bidders offered. And there were many bidders in the race.”
Again, the WNS deal may not have gone through but it isn’t a write-off yet. When Warburg indicated a willingness to sell, Bhasin had made an aggressive bid in excess of $500 million. Investment banking circles suggest that the WNS management was even in favour of closing the deal. But Warburg Pincus didn’t bite, and sought more up-front cash.
The deal could still happen sometime in early 2010. If it goes through, the wait could well be worth it for Genpact—WNS, the second largest pure-play BPO in the country, is almost half its size in terms of top line.
Still, the fact remains, that Genpact hasn’t been able to swing things when it matters. “There were one or two deals that we would have liked to go our way,” admits Bhasin.
Pricing Problems
So, why has it come a cropper when it comes to big-ticket deals? With $400 million in cash and cash-equivalents in hand, it certainly can’t be a shortage of funding. It couldn’t be the prospects either—Genpact performed consistently well even during the global recession. In the three quarters of 2009 to date (January-September), it maintained healthy top-line growth of 8.4%. Non-GE (General Electric) business is also picking up, rising 17.4% in Q3. While other players were laying off hundreds, the company added over 7,000 people to its headcount in 2009.
The deal-breaker, apparently, has always been the pricing. “We need to buy at the right price,” claims Bhasin. “It is always easy to pay more and hard to pay less.”
In 2009 alone, Genpact’s six-member M&A team—split between India and the US—looked into 40-50 prospective deals. They barely found seven to ten worthy of full-fledged due diligence. “Of these we took just 50% to the Board of Directors for consideration,” says Bhasin. Even after getting Board approval, another 50% fell through because of pricing issues.
The Iron Is Hot
But Genpact needs to make these deals work now, when many companies are ripe for the picking. According to TJ Singh, Research Director, Gartner India, the financial crisis has hastened the shakeout in the captive BPO space and this could well provide an opportunity for pure-play BPO companies like Genpact. Moreover, with IT companies such as TCS, Infosys and Wipro becoming more aggressive in the BPO space, M&As will become even more competitive, going forward.
For the company, it almost seems like an imperative. The GE business, which accounts for almost 40% of its top line, has been contracting. It dropped 4% in the third quarter, and is expected to remain depressed in the coming months. Analysts cite this—the need to de-risk itself of the diminishing GE business—as another reason for Genpact to look at acquisitions. They believe it should look at potential targets that would add to its domain knowledge in analytics, finance and accounting. “Genpact has to figure out ways to get into a non-linear growth model, into higher-margin businesses. It needs to broaden its offerings to existing clients and attract new ones,” says Mohit Sharma, CEO, Corrystone Global Partners, a consultancy. But, thus far, he’s quick to add, its captive acquisition strategy has not panned out.
On his part, Bhasin says the tough economic environment is also responsible for the lull in deal street. “If you can’t predict the future, how do you know what is the right price to pay today,” he says.
He expects to perform better in 2010, claiming that Genpact will sign at least three deals ranging anywhere between $50 million and $500 million in size. “We have a lot on the table,” he says, exuding confidence. After all, one big deal is all it will take to break the jinx.
By Sudipto Dey With inputs from Anurag Prasad
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