Operations of TCS

[Jaydeep]

Tata Consultancy Services’ acquisition of Citigroup’s India-based
captive business process outsourcing (BPO) arm CitiGlobal Services for
$505 mn is a bold move in these difficult times. When every one seems
to be holding on to whatever liquid funds they have, TCS has gone and
made an all cash acquisition.

That, however, does not in any way diminish the strategic significance
of the deal. CitiGlobal employs over 12,000 back-office workers that,
together with about 8,000 employee-strong existing outsourcing
operation, makes TCS the second biggest BPO outfit globally.

Scaling up organically to this level would have taken TCS a long time
even if so much business was available in these difficult times. Citi
has also committed to providing TCS outsourcing business worth $2.5
billion over the next nine and a half years.

This guaranteed revenue stream somewhat de-risks the acquisition. More
importantly, it builds a bond between TCS and Citigroup that could
yield a greater business engagement subsequently. Besides, through
this divestment Citi becomes the first global bank to outsource its
entire banking processes, including core operations, to a third
party.

This is an important development for the Indian BPO industry, one that
could open up the possibility of other global banks also outsourcing
banking processes to service providers in India.

The obvious criticism of the acquisition is that at nearly twice
CitiGlobal’s expected 2008 revenues of $278 mn TCS may have paid well
above the fair price. But then all acquisitions tend to be expensive
on standard valuation measures.

That is because, as against starting a greenfield business, an
acquisition brings an established operation and so some premium is
built into the price. One can also question the timing of the
acquisition. Tatas have acquired CitiGlobal at a time when IT business
is seen to be spiralling down and there is concern about growth rates
being sustained.

We will know the answer to this one in time but empirical evidence
shows that acquisitions made in a downturn have a far higher success
rate than those made in boom times.

[Jaydeep]