Investment and Consolidation Trends in the Outsourcing Sector The India Story

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Investment and Consolidation Trends in the
Outsourcing Sector(The India Story)

• Rahul Bhasin
• Managing Partner
• Baring Private Equity Partners (India) Ltd.
• Outsource-World
• New York, 17-18 October 2006

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Presentation Layout

• MA in Indian IT/ITES Sector - Facts
• Classifying MA by geography and service
  offering
• Future Expectations
• Investment Trends (Financial Investments)
• Impact on Stakeholders
• Participation in Consolidation is it a Choice?
• About Baring Private Equity Partners

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MA in Indian IT / ITES Sector

• IT ITES exports from India have grown almost 4x
  in last five years, reaching US 23.4 billion
  dollars in FY 2006
• Tremendous growth in size and scale of companies
  has accelerated the MA activity in recent years
• Over US 1.3 billion in MA in CY 2005, around 80
  deals
• In terms of number of deals, IT/ITES was the
  largest contributor among all sectors
• In terms of value of deals, it was third after
  Telecom and Energy
• In excess of US 1 billion in first four months
  of CY 2006 around 30 deals
• MA activity in IT/ITES sector growing rapidly
• Deal sizes are getting bigger

Source Grant Thornton Nasscom
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Classifying MA
New Geographies
Same Geographies
Same Services
New Services
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Break-up of MA Activity in IT/ITES Sector in
India
73 - Same geographies, new services
27 - New geographies, same services
Negligible activity in other classifications
MA in Indian IT/ITES industry reflects
globalization and diversification of service
offerings
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Indian Scenario - Same Geographies, New Services

• Examples
• Oracles acquisition of iFlex (core-banking
  solution, US 600 million)
• Subexs acquisition of Azure (revenue assurance
  and fraud management, US 140 million)
• Wipros acquisition of Spectramind (BPO services,
  US 100 million)
• Flextronics acquisitions of Future Soft and
  Deccanet
• Characteristics
• Global players acquiring Indian vendors
  capabilities various deal sizes from small to
  large
• Indian vendors acquiring companies small to
  medium size deals

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Indian Scenario - New Geographies, Same Services

• Examples
• EDS acquisition of Mphasis BFL (US 380 million)
• RR Donnelley acquisition of Office Tiger (US 250
  million)
• TCS acquisition of Comicrom BPO in Chile (US 23
  million)
• Secovas acquisition of Ultralink
• Characteristics
• Global IT services vendors acquiring execution
  capability in India. Tend to be large deals as
  scale is a must
• Indian vendors acquiring execution capability in
  other geographies. Small to medium size deals
• Indian vendors acquiring customer base abroad.
  Small to medium size deals

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Future Expectations

• Would expect to see larger acquisitions going
  forward by Indian companies, primarily in new
  service areas
• Drivers
• Indian companies are cash-rich. Total cash on
  balance sheet of TCS, Infosys and Wipro alone is
  around US 4 billion
• Companies have grown to a size where small
  acquisitions do not have short to medium term
  impact
• Increased risk appetite ability to assimilate
  large acquisitions being built over period of
  time Wipros string of pearls strategy
• Success factors
• Guarding against excess diversification
• Quick assimilation and integration of the
  acquisitions

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Investment Trends (Financial Investments)

• Majority of transactions being done currently
• Hiving off captives / divisions of large firms
• GENPACT (from GE by Oak Hill and General
  Atlantic, US 500 million)
• Flextronics Software Systems by KKR (US 900 mn)
• Growth capital / turnaround for existing
  companies
• Platform plays in niche areas
• Secova, Pharmarc, Quatrro, Newgen
• Secondary deals
• Softbanks purchase of Barings stake in
  Slashsupport
• No Greenfield activity in previously hot areas
  - voice-based support, CRM etc.

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Summary

• MA activity in Indian IT/ITES industry
• Acquisition of execution capability in India or
  abroad
• Acquisition of customer base abroad
• Acquiring new service offering capabilities
  (expected to accelerate in the future)
• Investment activity in Indian IT/ITES industry
• Hiving off large captives
• Growth capital / turnaround
• Platform plays in niche areas
• Secondary deals

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Impact on Stakeholders

• Employees
• ves Provides global opportunities for growth
• -ves Improper integration could lead to
  uncertainty and dissatisfaction

• Customers
• ves Increases range of services and
  geographies to choose from
• -ves Integration issues could lead to customer
  dissatisfaction

• Shareholders
• ves Increases growth opportunities, and
  scalability, leading to greater shareholder
  returns
• -ves Excess diversification, improper
  integration could hurt shareholder returns

• Vendors
• ves Provides a platform for global growth
  along with the company
• -ves As company becomes larger, older vendors
  could be marginalized

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Participation in Consolidation is it a Choice?

• Non-participation by Indian companies
• Only after careful evaluation of customer base,
  service offerings, verticals and execution
  capability
• If do not have strong in-house ability to build
  the above, will be left behind
• Non-participation by global MNCs
• Alternative is to build execution capability and
  diversified service offering in-house
• More amenable to execution capability (Accenture
  adopted organic route) rather than diversified
  service offering (IBM acquired Daksh, Oracle
  acquired iFlex etc.)

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About Baring Private Equity Partners

• Globally
• Founded in 1984
• One of the largest private equity players
• Operations in Latin America, Europe, Russia,
  Asia, India
• Over USD 2 billion under management
• In India
• Started in 1997, Headquartered in Delhi
• Best performing fund of 1998 vintage
• In 2005, raised Baring India Fund II. Theme
  India growth story
• Team of 9 investment professionals

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Thank You