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Two years ago, many had written off tech services company Electronic Data Systems. The Plano  company had lost top clients because it lacked low-cost offshore capabilities, it faced deep financial trouble, and employee turnover was growing. Some even speculated that EDS might be taken out by an upstart outsourcer from India. But the company restructured, sacked its chief executive, and sold off noncore businesses. Now, instead of the hunted, it has become a hunter. On April 3, EDS offered $380 mn for 52% of MphasiS, a Bangalore software and back-office services company. If the deal goes through, EDS's staff in India will grow from 3,000 to 11,000. “MphasiS helps us play offensively in the markets we serve,” says Stephen Heidt, an EDS vice-president. “It offers us capabilities that otherwise we'd have to develop ourselves.”

Plenty of Western software and services companies are coming to a similar conclusion. On March 20, Chicago printing giant RR Donnelley & Sons, which has its own 2,000-employee back-office processing unit in India and Sri Lanka, acquired OfficeTiger, a hot Indian analytics and accounting outsourcer, for $250 mn. And last year, software house Oracle paid $900 mn for 61% of iflex solutions, a banking software company based in Bombay. “With outsourcing going mainstream worldwide, Western companies that want a global presence will be looking to acquire an India operation,” says Sujay Chohan, researcher director for Gartner India.

Indian Suitors
The industry expects all sorts of deals in coming months. IBM, Capgemini, and electronics manufacturing and design giant Flextronics have been scoping out potential targets, insiders say. Dozens of small and midsize outfits in India might prove attractive to the industry's giants. Second-tier Indian companies such as Polaris Software Lab, Hexaware Technologies, Zensar Technologies, and Patni Computer Systems, and niche players such as telecom software maker Sasken Communications Technologies and back-office providers EXL Service and Datamatics could be prime targets. Even some bigger outfits could be in play. Bombay's WNS Global Services, a $200 mn-plus company that specializes in clerical work for travel and insurance companies, is planning an initial public offering this year, but could also end up being taken over.

The dealmaking is part of a broader consolidation of the info tech services industry. On April 4, for instance, El Segundo (Calif.)-based Computer Sciences Corp. (CSC) announced it was putting itself up for sale after struggling to rein in expenses. Providers need huge scale and low costs to compete for the multiyear, $1 bn-plus outsourcing contracts multi-nationals are offering in areas such as accounting, human resources, and research. In recent years, industry leaders such as IBM, Accenture, and Hewlett-Packard have added thousands of workers in India, but other players failed to see the opportunity. IBM, for instance, three years ago bought New Delhi call center operator Daksh for $150 mn, and now has 38,500 employees in India. “We started late in terms of leveraging capabilities in India, but others were even slower,” says Amitabh Ray, IBM's business consulting chief. “EDS, CSC, and others are just getting started.”

Foreigners won't be the only ones buying. Genpact, the world's largest offshore back-office player, which is 40%-owned by General Electric, but headquartered in New Delhi, could benefit from acquiring a company such as WNS to diversify its client base since it currently gets 85% of its work from GE. Homegrown champions such as Infosys, TCS, and Wipro will likely want to bulk up further and are making acquisitions in the West to better compete against multinationals.

Premium Prices?
One concern will be price. The Indian stock market has jumped from one record high to another this year as investors seek to cash in on the country's potential growth. Infosys, for instance, is trading at more than 35 times its expected 2006 earnings, and MphasiS' stock has shot up 15% in the past month alone. Some dismiss such valuations as unjustifiable, but the pressure to get an offshore presence in India is so great that Western companies might seize the opportunity now and pay such high multiples for fear of finding themselves out of the running.

It seems there will be no shortage of potential work. About $70 bn worth of outsourcing contracts will be up for renewal over the next two years, and billions more in new contracts will be signed, according to Forrester. “The back-office processing space is wide open,” says Sid Khanna, Accenture's global partner for outsourcing. “Many areas such as legal outsourcing and architecture back-office work are in their infancy and will make good, solid businesses.”

The EDS deal will give MphasiS a global partner that can market its services worldwide. The company, an early entrant in the business, has been struggling lately due to lack of a strong overseas presence, high attrition, and tensions between large investors, leaving MphasiS far behind larger rivals such as TCS and Wipro. EDS, meanwhile, will benefit from the Indian company's lower cost structure and its expertise in finance and accounting. And Heidt, the EDS vice-president, says MphasiS may be just the beginning. The Texas company has only 3,000 workers in India without counting MphasiS. But Heidt says EDS had planned to double that number this year, and ultimately may end up with 20% of its global workforce of 120,000 outside of the US.

Others surely will do the same. And increasingly, the stars of the global outsourcing industry are likely to find that fit with companies in India.

By Manjeet Kripalani, with Steve Hamm in New York

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