TCS has acquired Citigroup Global Services Limited (CGSL), the captive BPO arm of Citigroup, which in turn will pay TCS $2.5 billion over 9.5 years for ongoing provision of BPO services. The deal once again marks TCS as the boldest and most aggressive of the leading Indian offshore services companies at a time when acquisitive growth is a key strategy for the industry.
Indian firms are in acquisition mode
This is further proof that big acquisitions are now on the agenda of all the leading Indian IT services vendors. TCS, Wipro and HCL have now all made significant steps with their acquisition strategy leaving Infosys and Satyam, who have so far not been as aggressive in terms of M&A to reconsider their inorganic growth strategy.
It was Wipro, the most acquisitive of the leading players, that started the big deal ball rolling when it acquired Infocrossing for $600 million last year. Infosys also took on Philips F&A BPO captive last year in a $250 million deal. Meanwhile HCL Technologies is already on its third acquisition of the year, having just beaten rival Infosys with a £440 million offer for UK-based SAP services provider Axon. Over the summer HCL also picked up UK BPO player Liberatas financial services division as well as US-based Control Point Solutions.
But TCS has not been shy either, and this isnt its first big BPO deal. In 2006 it acquired Pearl Groups life and pensions operation in the UK, with a contract worth over £400 million to boot. And to top it off, last week a German newspaper reported that TCS was interested in buying SIS, the IT services business of Siemens.
This really is a big deal for TCS
The ramifications of this deal for TCS go beyond just the purchase price and the contract revenue that comes with it. It is a good example of an end-to-end relationship with Citigroup, as this deal builds on existing applications, infrastructure, and support services that TCS provides the bank.
This is the Holy Grail for any global IT services vendor but very few, particularly amongst the Indian vendors, have managed to pull off such a feat. Now more than ever, TCS can justify its positioning as an end-to-end service provider.
But of course there are a lot of impressive numbers attached to this deal too. The contract will push TCSs annual revenues up by about 5 per cent. And even better, CGSL is running EBIT margins of 20 per cent, which is respectable and wont dent TCSs own 27 per cent margins too significantly.
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