Financial Daily from THE HINDU group of publications
Saturday, Apr 10, 2004
Mergers & Acquisitions
`It's win-win deal for IBM-Daksh'
New Delhi , April 9
WHEN you cannot beat competition, it is best to join it. And if you get paid handsomely, it is a true "win-win" transaction. That seems to sum up the IBM-Daksh deal announced on Wednesday, according to an independent analysis by Avendus Advisors, an investment bank for the IT sector.
The $130-170 million buy-out deal, according to Avendus, makes sense for Daksh e-Services Ltd as IBM has recently signed deals with Sprint and Aetna, two of the largest clients for Daksh.
According to the multi-billion dollar deal announced in February, the $89-billion IBM is to provide ongoing consulting support for all Sprint customer service processes. It will also take over management of Sprint's existing vendor operated call centres and assume management of the company's call centre at Nashville, Tennessee.
"Sprint accounts for at least one third of the revenue for Daksh and that would have surely meant stiff competition. On the other hand, Daksh's strength lies in its role as a dominant service provider of offshore customer support to Sprint. These two factors make this deal a business necessity for both IBM and Daksh," according to the analysis.
The deal, which is to be completed by next month subject to necessary approvals, makes sense for IBM due to the growing competition from global IT technology consulting and outsourcing vendors such as Hewlett Packard and Accenture.
Analysing the financials, the Avendus study says that assuming the size of the deal at $160 million, and Daksh's revenues for 2003-04 and 2004-05 at $53 million and $75 million respectively, IBM has paid 2.1 times the anticipated revenue for the new financial year. In comparison, when Wipro bought out Spectramind, it had paid 2.7 times the projected revenue for the next financial year.
"Considering that mergers and acquisitions in the Indian BPO industry happen at 1-1.5 times the forward revenue, the IBM-Daksh deal shows that market leadership and scale can attract a significant premium," it says.
Avendus says that the deal, however, does not mean the end of the road for independent third party BPO companies in India.
"We still believe that independent third party BPO players will survive on their own. They will go public and create shareholder value depending on what their customers are doing on their outsourcing strategy at a global level and by the appetite of their existing investors for risk," it says.
Post-acquisition, Daksh will become a 100 per cent subsidiary of IBM Global Services.
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