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Tata buys Citi's Indian outsourcing arm
By Joe Leahy in Mumbai
Published: October 8 2008 14:16 | Last updated: October 8 2008 14:16
Tata Consultancy Services on Wednesday bought Citigroup's Indian business processing outsourcing unit for $505m in a deal that could become the first of many as global financial services groups seek to raise capital to weather the credit crisis.
As part of the deal, Citigroup has agreed to guarantee it will source $2.5bn of services over more than nine years from the unit, Citigroup Global Services, making the US firm TCS' largest client with around $500m of business a year including other contracts.
For TCS, the deal will enable it to offer a range of financial transaction services to clients other than Citigroup, a move India's largest outsourcing company hopes will catapult it to the lead of the financial BPO industry.
"Now we have the opportunity to take it [financial BPO services] to a number of other clients – that's a huge growth opportunity especially under today's market conditions," said N. Chandrasekaran, chief operating officer of TCS.
The deal represents a bet by TCS that once the global credit crunch bottoms out, financial groups will begin to outsource more of their core back office processes, such as handling customer transactions, to third parties to try to cut costs.
It also continues a trend among multinationals of offloading their "captive" business process outsourcing units in India to third party vendors to streamline their operations and raise capital.
This week, Japanese securities firm Nomura bought the back office operations of Lehman Brothers in Mumbai while in 2004, General Electric sold 60 per cent of its Indian back office unit, today known as Genpact, to private equity firms.
Citigroup Global Services employs about 12,000 people and is expected to generate sales of about $278m this year.
"This transaction is expected to help reduce operating expenses related to business processing and will allow us to focus on our core financial services competencies," said Don Callahan, chief administrative officer of Citigroup.
Citigroup Global Services' margin based on earnings before interest is 20 per cent, according to Mr Chandrasekaran.
He said the outlook for the Indian outsourcing industry presently was still negative, with clients waiting for a resolution of the credit crunch before committing themselves to new outsourcing contracts.
But he said by the time the acquisition was fully consummated in the first half of next year, he expected clients to be more willing to start outsourcing additional operations and processes to cut costs.
"We just need the uncertainty to be over – when uncertainty is there, clients won't take positions," said Mr Chandrasekaran.
Copyright The Financial Times Limited 2008
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