TCS acquires Citigroup Global Services—and bags a giant contract to provide outsourcing services to Citi for the next nine-and-a-half years
It's festival time in India, and Tata Consultancy Services, the country's largest IT software and services provider, is celebrating with gusto. After months of speculation, TCS acquired Citigroup's (C) India-based outsourcing unit, Citigroup Global Services, for $505 million in an all-cash deal announced on Oct. 8. That's the largest-ever purchase for TCS. What's more, the company bagged a $2.5 billion contract to provide process outsourcing services, application development, and infrastructure support to Citigroup and its affiliates over nine-and-a-half years. "This transaction will complement our domain expertise and bring new capabilities to TCS that will help drive growth," says S. Ramadorai, chief executive officer of TCS.
At a time when stock prices of India's outsourcing powers are crumbling (BusinessWeek, 10/2/08) amid fears of a deep global recession, the TCS deal shows executives are nonetheless confident Indian software service providers will remain competitive in tough times. The Citi contract is the biggest win ever for an Indian company. TCS edged out contenders such as IBM (IBM) and French IT company Capgemini, and the promise of steady business from the deal encourages some analysts. "The revenue visibility in the TCS contract is a big plus in this tumultuous market," says Abhiram Elaswarupu, IT analyst at BNP Paribas in Mumbai.
The Citi deal helps TCS go up against its big foreign competitors directly. Unlike IBM, Accenture and EDS, all big players in India, homegrown companies typically have operated with smaller-scale deals, lasting two to three years and worth $50 million to $200 million. Just last October, TCS had crossed the $1 billion threshold (BusinessWeek.com, 10/18/07) when it signed a 10-year, $1.2 billion contract with Dutch group Nielsen, which owns ratings major ACNielsen.
Acquiring Citi's unit brings 12,000 new employees into the TCS fold and is expected to generate revenues of $280 million this year. Currently, TCS, which has over 10,000 employees in its outsourcing units across the world, makes more than $150 million providing services to Citi alone.
TCS has been providing IT services to Citi since 1992, catering to the bank's operations in North America, Europe, India, Singapore, and the rest of Asia Pacific. As with most big Indian software providers, banking and financial services form a big chunk of TCS's business, accounting for 43% of revenues. The new outsourcing contract will nudge it a percentage point ahead, says a TCS manager.
With the world's financial industry in turmoil, this isn't the best time for an Indian outsourcer to be expanding its exposure to the sector. However, analysts say they are more concerned about TCS overpaying to acquire Citiglobal. TCS should have negotiated a better deal, given the fall in company valuations that has accompanied market meltdowns around the globe, they say. TCS claims the price is justified and argues the acquisition will help the company serve not only Citi but other customers as well.
Still, some analysts are skeptical. On Oct. 8, the day TCS announced the deal, its shares closed down 5%. Year to date, it's off 49%, compared with a 35% drop for the benchmark Sensex index. John McCarthy, a vice-president at research firm Forrester Research, warns the track record for Indian companies using acquisitions to expand their customer base is not great. "The BPO industry is littered with deals like this one that have not led to large-scale work beyond the individual clients," he says.
McCarthy believes TCS's latest buy is a long-term play. "This is about ensuring that when the dust settles [after the Wall Street crisis], TCS is well positioned to help the client clean up their mess of systems and do new projects," he says. "Anything beyond that is wishful thinking."
The TCS buy is the latest example of Indian software majors aggressively expanding to other geographies to reduce their reliance on the U.S. Over the past three years, TCS has made purchases in Switzerland, Chile, and Australia. Last year rival Infosys Technology (INFY) bought out the outsourcing business of Dutch electronics major Philips, and Wipro (WIT) acquired U.S.-based, Nasdaq-listed outsourcing outfit Infocrossing. Infosys and New Delhi-based HCL Technologies have been battling for SAP's consulting company Axon; on Oct. 10, Infosys announced it was backing away from the deal, giving the win to HCL.