Tell him about the street talk regarding AT&T’s interest in his company, and the reaction is sharp and swift. "This is a white lie, there’s absolutely no truth in this," retorts Rakesh Kumar, CEO of Global Vantedge in Gurgaon, to speculation of his company being a target for acquisition.

While sources insist that a deal has already been concluded, Kumar refuses to comment. But he does admit that Indian independent third-party BPOs like Global Vantedge, vCustomer and 24/7customer are all fast becoming attractive targets for big companies in IT services and other businesses.

Indeed, the recent IBM-Daksh deal could only be the first one in a series of M&As soon to be witnessed in Indian BPO industry, if sources are to be believed. Apparently many other global majors are eyeing medium to large sized independent BPOs for possible acquisitions. A recent Financial Times report quoted bankers involved in IBM-Daksh deal as saying that two more new deals could well suggest that the biggest names in corporate America are becoming more aggressive in off shoring.

Neelesh Hundekari of KPMG concurs: "Some of our large overseas clients are actively looking for possible acquisitions in Indian BPO industry."

But why this newfound interest in Indian BPOs? The answer clearly lies in IBM’s acquisition itself. "Many Indian companies, including Daksh, have grown from scratch and built a wonderful process outsourcing ecosystem, from infrastructure to recruitment and training, while simultaneously building industry’s best practices around these functions. As a result, they become very attractive for a client like IBM who is saved from all the time and effort it takes to reach that level and scale," says Hundekari. With Daksh, IBM has now has a foundation to offer services to any of its clients worldwide, apart from access to Daksh’s capabilities. "It does make sense for IT companies to acquire to gain speed to market," says 24/7 Customer CEO PV Kannan.

Besides, "capabilities in BPO are increasingly becoming a must-have for global IT services firms, who otherwise have had little business servicing IT clients out of their ventures in India", says BPO analyst Bhavtosh Vajpayee of CLSA. Acquiring BPO companies is the easiest way to earn back-office capabilities. "IBM will eventually have Daksh as its backend," says Vajpayee.

Now that a precedent has been set, there is little to hold back other global IT services giants—the likes of HP, CSC and EDS—to beef up their own BPO capabilities in India.

Looking for Suitors?
While closed-door M&A parleys by several leading independent Indian BPOs are believed to have taken place, an industry analyst insists that "only those who have gone through second or third round of funding from VCs would become primary targets".

Based on this criteria, companies like vCustomer and EXL Service of Noida, Global Vantedge of Gurgaon and 24/7 Customer of Bangalore seem to fit the bill. "Whether a company is going to get acquired depends on what stage of VC funding it is, and the degree of control exercised by the VC," says Sujit Bakshi, president India and global head of operation, vCustomer. Is vCustomer open to the idea of an M&A? "No we aren’t. We do not need cash, our balance sheet is healthy and we are getting customers."

But for companies who are not getting enough customers, or want to cover a larger market, getting married to a larger partner is going to be the only option. "Players like 24/7 Customer can stay independent…at the same time they can always partner with IT companies to cover the market space," Kannan says. Kumar of Global Vantedge agrees. "There is no rush at the moment, although it is a matter of time. Whether independent pure-plays survive or not depends on the strategy they adopt," says Kumar.

Goodbye, Lone Rangers
Life for independent pure-play BPOs is bound to get tougher post the entry of giants in the arena. Competing for customer contracts against giants like IBM and Accenture is not the best way to do business, as these BPOs are bound to find out sooner than later. "This (IBM-Daksh) deal means that BPOs need to be part of a bigger outfit," said Ravi Ramu, CFO of Mphasis BFL, which has a fast-growing back-office unit, MsourcE.

However, others dismiss the idea. "It (IBM-Daksh deal) does not mean pure plays cannot exist. In the US, while players like EDS and Accenture have an IT/ITES mix, companies like Convergys and others have thrived," says Kannan. "The reason is companies like IBM, EDS and Accenture play in the $100 million to $1billion mark deals… companies like 24/7 Customer do not play in the same level of revenues and we are quite happy to chase $5-20M in annual revenues."

But then analysts are already defining future rules of the game—customers will increasingly look to go to one-stop shops that can offer both IT-related and IT-enabled outsourced services. The industry is already showing signs of moving towards integrated services offering, first witnessed through Wipro’s acquisition of Spectramind a couple of years back.

Testing New Waters
According to Hundekari, there are other, specialized opportunities for industry to look at, which also make use of India’s core advantage in an abundant and highly educated workforce. "For example, HR outsourcing is a big growth area in BPO, but there are no big players offering any services in this field, anything more than basic payroll services," he says. Similarly there are opportunities possible in fields like instructional design, CAD/CAM, knowledge management and more.

"Specialized or not, every VC funded company is going to be a target for acquisition. "Venture capitalists will look for exit all the time, that is fundamental to their business model," says Kumar, who himself is funded by Chrysalis Capital.

Take HP, a big client at Daksh—if it does indeed pull out of Daksh post-acquisition, as it is tipped to be, it may as well begin looking for acquiring its own BPO outfit. Then there is additional speculation about telecom giants, (including our very own Bharti), looking to enter the industry through acquisitions route. The action is probably just about to heat up in the industry, as the list of contenders for buying Indian BPOs grows bigger.

Rishi Seth in New Delhi

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