Other than reflecting the growing ease with which Indian companies are acquiring businesses outside India, the new trend marks a milestone in the development of the Indian BPO sector, which is now growing faster than software services.

New trends

Essar, Datamatics, Godrej and Intelenet, jointly owned by TCS and HDFC, have acquired BPO businesses overseas in the last few months Essar has picked up a 40 per cent stake in the Aegis Communications group Last year, Essar acquired e-telequest, which may be consolidated into a single BPO entity with Aegis in future High net worth individuals in Dubai are investing in venture capital funds, which are buying US companies and migrating a part of the operations to the Middle East

Essar, Datamatics, Godrej and Intelenet, jointly owned by TCS and HDFC, form a growing list of Indian companies that have in the last few months acquired BPO businesses overseas in the footsteps of HCL, which pioneered the process by a buying a BPO company in Northern Ireland two years ago.

The foreign acquisitions are a departure from the trend so far of foreign and Indian companies setting up operations India to take advantage of the cheap and abundant supply of skilled workers in India.

Industry leaders are agreed that buying small to medium companies abroad is the main route open to Indian businesses that want to make a late entry into the BPO space or grow their modest BPO businesses.

Successful Indian BPO operations like Wipro Spectramind, Daksh, 24/7Customer or Infosys, which has a majority stake in BPO company Progeon, are not in the buyers' league but Essar, which is making a late entry, and TCS, which has not grown its BPO business very rapidly, are there.

After ICICI OneSource acquired FirstRing and the Aditya Birla group acquired TransWorks, the supply of acquirable companies has dried up and "it has become very difficult to buy a BPO company in India," says Vivek Kulkarni, CEO of B2K and former IT secretary of Karnataka.

The only other way to grow is organically and if you are not a big player then you come up against the major hurdle of customer acquisition, something difficult to do from India.

"The way to grow in IT/BPO is by acquiring marquee clients and this is what the acquisitions are seeking to do. The new Indian owners can use the name and track record of the US company and also take over its revenue stream and existing clients to go forward in the business. So the business model gets derisked," says K Ganesh, one of the veterans in the Indian BPO business who sold his CustomerAsset to ICICI OneSource last year.

Essar acquired a 40 per cent stake in the Aegis Communications group, a $ 150 million listed company in which Deutsche Bank also has a 40 per cent stake. Aegis has 11 centres across the US, with around 5000 seats.

Vikas Saraf, CEO of Essar Teleholdings through which the acquisition was made, says, "Aegis has an excellent customer base (AT&T, American Express, SBC, Concast) and we wanted to take advantage of that existing customer relationship in the US and then extend it to India. Aegis is looking at a significant portion of its revenues to come from India."

Last year, Essar acquired e-telequest and in the future it may be consolidated into a single BPO entity along with Aegis.

For every deal there has to be a willing buyer and a seller and in this case the "valuations of the acquisitions are attractive and low. For US based small to medium companies it is an opportunity to exit, as margins are squeezed and there is no end state (light at the end of the tunnel).

"The Indian companies, on the other hand can bring back a part of the operations to India, make a 50 per cent saving on the cost of those operations, and thereby improve profitability," adds Ganesh.

Avinash Vashistha, managing director of neoIT, a consultancy in offshoring, agrees and adds a further dimension.

"Venture capital funds are also doing the same thing," and cashing in on the arbitrage opportunity.

A VC can acquire a controlling stake in a US BPO company with low margins and valuations, migrate close to half the operations offshore, make around 30 per cent savings, improve the bottomline by around 20 per cent and exit after two years by getting a valuation which is two or three times higher.

"This is also being done out of the Middle East. High net worth individuals in Dubai are investing in VCs which are acquiring US companies and migrating a part of the operations to the Middle East," he adds.

There is a need for big corporates to be behind the acquisitions as "BPO is a capital intensive business. Besides, customers who are shifting key operations need to be satisfied both about the financial strength of the supplier and also his ability to offer proper business processes," explains Vashistha.

So along with acquiring a ready revenue stream and customers, the new BPO player is also securing the business processes that the BPO operation has picked up by doing the client's work.

K P Balaraj, managing director of the venture capital firm WestBridge Capital Partners, feels "we will see more activity in the next few years, both with US companies acquiring Indian back ends and Indian companies acquiring front ends."

But he makes it clear that it is only the weaker US players, which will be up for grabs as stronger and bigger players like Convergys have already acquired strong offshore capabilities.

Harish H V, director of A F Ferguson, echoes the same sentiment when he says, "Indian companies are acquiring for clients and US companies are selling out as they are not in a position to compete with companies like Convergys who have their own shops in India."

While there is general agreement that these acquisitions make overall sense, there is plenty of advice floating around on the need to be careful.

Says Balaraj, "Buyers need to be very careful here and do proper due diligence, or we are going to see a lot of failed integration and migration efforts."

Prakash Gurbaxani, CEO of Aditya Birla group owned TransWorks, while clarifying that his group is not into overseas acquisitions, adds, "It is easy to acquire but difficult to make the acquisition work. It makes no sense to me for a company without any base in India to acquire a company in the US. "

His further thought is that it is not right to buy a company merely to acquire scale. "Acquisition should bring in domain expertise which is needed to go up the value chain and quit the generic space."