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May 12, 2008

Is acquiring captives a mug's game?

Basab Pradhan, CEO of Gridstone Research and former Head of Sales & Marketing at Infosys, has a critical post on Indian IT Services companies "acquiring" the captive outsourcing units of MNCs.
(The MNCs) expect the Indian outsourcer to ‘acquire’ (their) Indian subsidiary and pay them for transferring a “stream of cashflows”. To me this seems like an unnatural act. I can’t see how the IT services company can justify this beyond paying for the acquisition of assets. But there is obviously a way this is being justified because it is happening.

...None of these justifications work for me. They are ways to rationalize what these companies feel compelled to do to meet short-term expectations from the market. By this logic, every client outsourcing work in the US should first form a subsidiary, transfer all employees into it and then ’sell’ the subsidiary.

This new game is a dangerous one. It tells a story of an industry that doesn’t know how to respond to the triple whammy of costs, exchange rates and a US recession.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.