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April 16, 2004

The coming drought for BPO IPOs

By Arun Natarajan

At a time when the center of gravity of the global Business Process Outsourcing (BPO) industry is moving inexorably towards India, it is ironical that public investors in the country are getting left out of the action.

Up to 2002, Spectramind and Daksh--which were very early movers in the third-party BPO space--seemed the mostly likely candidates for making IPOs. The fact that both were venture capital backed added to the likelihood. Then, Wipro stepped in to gobble up Spectramind for about $102 million. Daksh CEO Sanjeev Aggarwal was telling the media right until March that "we plan to go public in 2004-05". Then, IBM stepped with $150 million plus in cash. And it was good bye public.

As if this wasn't enough, Citigroup has announced that it intends to buy out public shareholders and delist e-Serve International. e-Serve, in which Citi already owns a 44% stake, provides BPO services to Citigroup entities in more than 25 countries.

If there is a strong public appetite for BPO companies, supply will follow, right? With the exception of IL&FS Venture Capital-funded Datamatics Technologies (ranked No.15 in Nasscom's ranking of third-party BPO companies), the IPO pipeline--for top ranked BPO firms at least--seems quite parched.

MphasiS-BFL' decision to integrate its BPO arm MSourcE with itself (since BPO contributes substantially to overall revenues of the group), is an indication that IT services companies will be in no hurry to list their BPO arms.

There are a very few significant sized third-party BPO firms (read "Top 10") that remain independent. The short list includes Warburg Pincus-backed WNS Global, Sequoia Capital-funded 24X7 Customer, Oak Investment Partners funded Sutherland Global, and Oak Hill Capital Partners and Financial Technology Ventures backed ExlService. However, all these companies--with the exception of WNS--are headquartered in the US and have received their investments in that country. Hence, even if they do go IPO, they'll most likely list in the US. In an interview to Knowledge@Wharton, Wolfe Strouse, managing director at Warburg Pincus, said her firm would look at an exit from WNS (which was earlier a subsidiary of British Airways) via an acquisition or "an IPO in India, the UK or the US". So, not much hope here either for Indian investors.

How about second-rung players? In the face of competition from MNC BPO firms (like Convergys) and the local IT giants (like Wipro and HCL), these companies seem to be busy selling themselves off to larger players. Examples include ChrysCapital-backed TransWorks which was sold off to Aditya Birla Group company Indian Rayon, WestBridge Capital-funded FirstRing that was acquired by ICICI OneSource, and e4e Inc-funded iSeva, which is being acquired by US-based ECE Holdings.

In fact, with the phenomenal reception for Biocon's IPO, even the attention of the fly-by-night guys--the financial services-turned software-turned dotcom companies--is focused on biotech. (After all, at $750 million, Biocon's IPO valued the company at five times what IBM paid for Daksh.)

Unless WNS decides to do an IPO and list in India, it looks like Indian investors wanting to buy into the "BPO boom", will have to make do with "proxies" like IT companies with significant BPO arms, ICICI Bank (which owns ICICI OneSource) or even Indian Rayon!

Arun Natarajan is Editor of TSJ Media. He can be reached at arun(at)