IT services firm Cognizant Technology Solutions is soon to follow what tech companies started doing long back; getting into the Acquisition spree, offcourse. As cognizant looks around in its spree, it has been observed that the country's largest BPO, Genpact seems like a good catch. According to industry sources, the company has been doing due diligence of BPO leader Genpact to acquire a controlling stake since a month. As expected, if Cognizant finally acquires Genpact, it would be one of the largest technology deals in India and would redefine the pecking order in India’s IT industry.
“Cognizant is carrying out its due diligence of Genpact. The process started a few weeks ago,” sources aware of the development said. “Investors in Genpact may be looking for a 30% premium over its market value,” they said.
BPO constitutes about 5% of Cognizant’s revenues and the firm is aggressively planning to plug the gap in its services portfolio. “Genpact was in talks with Infosys as well, but the conservative blue chip had reservations on the high valuations as well as the impact on its margins,” sources said. Genpact's margins were a bit below Infosys's corporate average.
Listed on the New York Stock Exchange, Genpact had revenues of $1.12 billion in 2009 and has a market capitalisation of $3.50 billion. Cognizant, listed on Nasdaq, had revenues of $3.28 billion in 2009 and has issued guidance for $4.46 billion this year. When added to the upper end of Genpact’s forecast of 17% growth in 2010, the combination would yield $5.77 billion in top line.
Genpact was founded in 1997 as an India-based captive business process services operation for General Electric Capital Corporation. Genpact later in the year 2004, started operating as an independent company and debuted on NYSE in 2007. GE’s shareholding in the company has now declined to 19.95 million shares or 9.14% after the firm divested its shares in a secondary offering completed in March this year. General Atlantic and Oak Hill Capital hold 89.57 million shares or 41%, while Wells Fargo holds 12.46 million shares or 5.71%.
An analyst said Cognizant could be eying 51% stake to begin with. “It would be a perfect acquisition. Both firms are process-driven. While Cognizant desperately needs BPO capability, there may not be a future for standalone BPOs in the future,” he said. BPO is being taken as a major differentiator and an entry point to cross-selling other IT services.