Infosys BPO to buy US back-office company

Will spend $58 million to acquire McCamish Systems

Infosys BPO, the business process outsourcing (BPO) subsidiary of Infosys Technologies, has signed an agreement to acquire US-based privately-held BPO services provider McCamish Systems for $58 million (around Rs 265 crore).

This includes an upfront payment of $38 million (around Rs 175 crore) and an additional amount of up to $20 million (around Rs 90 crore) upon achieving certain financial targets, which will be paid to the seller over the next three years, the Bangalore-headquartered company said.

This is the second acquisition by Infosys BPO. In July 2007, the company had acquired the captive BPO operations of Dutch consumer giant Philips in Poland, India and Thailand.

The Atlanta-headquartered McCamish Systems, which provides BPO solutions to insurance and financial services companies, mostly in the US, had revenues of $38.2 million in the year ended December 31, 2008. McCamish has 39 active customers, including 10 of the top 20 insurers in the US.

Infosys BPO, which reported revenues of $280 million (about Rs 1,288 crore) in 2008-09, employs 16,500 people. During the first half of this financial year, it recorded revenue of Rs 643 crore. The acquisition of McCamish will provide the company onsite capability with a direct presence in the US for the first time.

“The deal will enable us to bring together a convergence of operations and technology. Infosys BPO has in-depth knowledge of the insurance and financial services sector, and this deal reinforces our position in providing business platform services," Amitabh Chaudhry, CEO and MD of Infosys BPO told Business Standard.

Analysts say this is a good buy for Infosys, considering that US insurers are traditionally very conservative when it comes to offshoring, unlike British insurance companies. McCamish has an existing proprietary platform which is used by many insurance companies in the US. Infosys, opine analysts, would leverage its reach to move work offshore.

Sabyasachi Satpathy, Partner of offshore advisory company Tholons, said the acquisition of McCamish has provided Infosys an entry into platform-based BPO services. "I think it is a very important buy for Infosys. The most important thing is that Infosys was trying to get into platform BPO (non-linear growth or non headcount-related growth) for the last couple of years, which is what they have succeeded in doing with this acquisition."

With this acquisition, Infosys can create a niche BPO in financial services, he said.

Nikhil Rajpal, VP, Global Sourcing Practice, Everest Research Institute, says with the acquisition of McCamish, Infosys could now break into the traditionally conservative US insurance market. "US insurance companies are conservative when it comes to offshoring. We haven’t seen any US insurer who is offshoring in a large number. Considering that Infosys is a big company with a global reach, they would now be able to leverage McCamish's platform to get more works," adds Rajpal.

In the ongoing calendar year, McCamish is expected to achieve a turnover of $28-29 million owing to a drop in business demand in the wake of the global financial recession, which has affected the US financial and insurance sector to a great extent. Owing to this, Infosys expects the operating margin of the acquired company to be negative in the current year.

"We are confident they would soon be profitable, as the market is bouncing back in the US. Besides, while they had not been able chase large deals earlier because of their size, being a part of the Infosys family will now place them in a better position to compete with bigger players in this category," said Chaudhry.

He said post the acquisition, expected to be complete in the next 30-45 days, Infosys would retain all the existing 260 employees. However, some portion of the works could be moved to offshore locations to leverage the cost advantage.

BPO scene gets hotter

The BPO space in India, opine analysts, is expected to witness a spate of merger and acquisitions in the next 6-12 months, as most of the equity investors in these companies are now planning to exit.

ExlService Holdings, for instance, signed an eight-year agreement last week to service the back-office operations of American Express Business Travel and the associated acquisition of American Express' Global Travel Service Center operations in Gurgaon. Though the company did not disclose the size, it expects over $160 million (Rs 752 crore) in revenues. The purchase price for this transaction is approximately $30 million (Rs 141 crore) net of working capital adjustments at closing.

It was only recently that India’s third largest IT services company, Wipro, said it is eyeing acquisitions in the BPO space. “The BPO space is likely to be the next engine of growth for the IT industry. Also, the economy has improved and the IT demand situation is improving,” Suresh Vaswani, joint chief executive of the company's IT business, had said.

HCL Technologies CEO Vineet Nayar has also said his company is looking at platform-based acquisitions for a BPO to fill capabilities in the enterprise applications and infrastructure segments in countries like Europe and China.