India’s largest IT services provider Tata Consultancy Services (TCS) beat business process outsourcing (BPO) majors like Genpact and IBM to acquire the back-office operations of Citigroup for $505 million (over Rs 2,400 crore).
After the acquisition of Citigroup Global Services Ltd (CGSL), TCS will be the second-largest BPO player globally, after IBM.
Along with the sale, Citi also signed an agreement with TCS to provide process outsourcing services worth $2.5 billion (around Rs 12,000 crore) over the next nine-and-and-a-half years. Citi will be the first global bank to have outsourced its entire banking processes, including core banking operations, to a third party.
While TCS defended the valuations, particularly during the financial turmoil, analysts termed the acquisition expensive. “The valuation is certainly high. The $2.5-billion deal would translate into over Rs 1,250 crore of annualised revenues. With CGSL listing its operating profit at 23 per cent, the payback time may be around 11 years for the money invested,” said an analyst at a leading brokerage.
Even the company’s argument that the acquisition of CGSL gives an opportunity to cross-sell did not convince analysts. “That will take time and further investment from the company. So, the immediate impact is negligible,” said another analyst.
In terms of the acquisition valuations, TCS said that the Citi BPO has had a consistent revenue growth rate of 27 per cent and earnings before interest and taxes (EBIT) margins are of the order of 20 per cent. The BPO has 12,472 employees, who will now join TCS along with the existing management team. The BPO will operate as an independent entity.
“We are confident that after the integration the EBITA margins of the BPO will be in the range of TCS’,” said the IT company’s COO and Executive director N Chandrasekaran.
Sanjay Nayar, CEO (South Asia) for Ctitbank, said: “We have been at this for quite some time. We have been able to consolidate all our businesses. We want to focus on our core operations. We will use the freed up capital for productive businesses.” This deal also means that TCS would be the single largest vendor for Citigroup.
“This acquisition is very strategic for TCS. This will also propel the TCS BPO business to a completely different level. With this Citigroup becomes our top client. This is the first time that core banking operations, which till date are in the realms of banking firms, will be outsourced. That allows us to take these services to other clients. More so, to the small- and medium-sized banks,” said TCS CEO and Managing Director S Ramadorai.
Chandrasekaran said that the tools created by CGSL would also be handy. “This, along with TCS financial products, will allow us to take our BPO platform strategy further. The revenues from the deal will accrue from the fourth quarter of 2008-09, or may be slightly delayed,” he added.
