Merger Fever Breaks Out In Bangalore

IBM's $150 million purchase of Daksh may trigger a wave of acquisitions

Think of Indian Tech, and what companies come to mind? Three, certainly: Infosys Technologies Ltd. (INFY ), Wipro Ltd. (WIT ), and Tata Consultancy Services. And now, IBM (IBM ).

IBM? As of Apr. 7, IBM ranks right up with Infosys, Wipro, and TCS as a heavy in the Indian tech universe. That's the date when the U.S. giant agreed to shell out an estimated $150 million for Daksh eServices, the third-largest Indian call center and back-office service provider, which has revenues of $60 million. IBM, say Indian insiders, bid up to 50% more than the closest bidder for Daksh, and in the process acquired an up-and-running operation with 6,000 employees. Added to IBM's current operations, the Daksh deal makes Big Blue an Indian biggie, with 15,000 employed in India -- not far behind Tata, Infosys, and Wipro. IBM may add another 6,000 by yearend, according to Indian industry sources.

The Daksh acquisition could also mark the start of a hectic merger season. Within a week of the deal, Citigroup (C ) announced it would raise its stake in e-Serve International Ltd., a publicly listed Indian back-office operation, from 44.4% to 75%. Accenture Ltd. (ACN ) and Electronic Data Systems Corp. (EDS ), for example, are both ramping up in India: IBM's move may force them to buy their growth fast. Analysts suggest other takeover targets could include call-center operators and back-office specialists Tracmail and EXL Service. "IBM has set a benchmark, and now everyone is running around trying to do a deal," says Ravi Menon, director of corporate finance at HSBC Securities (HBC ) in Bombay. One Western player that may exit is General Electric Co. (GE ): Indian sources say GE may sell its Indian call-center business while keeping other operations.

IBM's pounce shows how rich Bangalore is as a hunting ground. While U.S. stockpickers have focused on Indian giants like Infosys, the country has produced some 400 other, mostly private, companies that specialize in call centers and offer back-office operations in everything from tax accounting to insurance adjustment.


The jargon for all this is BPO -- business process outsourcing. Whatever you call it, it's huge globally, and India is a key player with $3.5 billion in annual revenues and 50% to 60% average annual growth. The Indian entrepreneurs who started such ventures are being nudged into deals by their private-equity backers, who now want to cash out. Some are doubling their money in the process.

It's also clear that companies like IBM see the back-office business as a major source of growth, despite all the clamor over lost jobs in the U.S. Building big in India gives IBM the chance to combine an inexpensive, highly talented labor pool with all the expertise in radically streamlining office functions that the company has acquired in decades of consulting to multinationals. IBM wants to tap Daksh for work with clients across Asia as well, where outsourcing is just taking off.

Will any of the multinationals bid for India's biggest IT companies? Analysts doubt it. Infosys, Wipro, and TCS are $1 billion-plus operations with market values of up to $10 billion. More important, though firms like Wipro run back-office operations, they're stressing software and consulting. Foreign companies are more on the prowl for back-office shops. But top Indian companies know that now more than ever they must keep workers happy. Infosys, for example, just raised wages across the board by 15% to 17%.

Meanwhile, IBM is getting business in India, too, including a $750 million outsourcing deal from big telecom player Bharti Tele-Ventures in February. "The company we hit up most against, even in India, is IBM," says Bangalore entrepreneur Ashok Soota, chairman of MindTree Consulting. IBM, that Indian powerhouse.

By Manjeet Kripalani in Bombay, with Steve Hamm in New York

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