|Capgemini's Rao: Racing
a poster for globalistion and the growing importance of India
in global outsourcing. When Paris-based it consultancy Capgemini
announced that it was buying American technology services group
Kanbay International for $1.25 billion, industry experts knew
the driver for the deal was located in another continent, in India.
In one stroke, Capgemini has become India's third largest it MNC
employer (excluding BPO headcount) by taking over 5,000 Kanbay
employees in India. Only IBM with 20,000 employees and Accenture
with 12,500 employees are ahead of Capgemini, which will have
12,000 employees by the end of the year. The Kanbay acquisition
has also helped the French major leapfrog over EDs, which after
its MphasiS acquisition has 9,000 it services employees.
What's more interesting is that in terms
of percentage of total employees, Capgemini will rule the pack
with nearly 16 per cent of its global workforce in India, ahead
of IBM (11 per cent), Accenture (11 per cent) and EDs (8 per cent).
"With this acquisition, Capgemini India becomes the second
largest entity within the company. Only France with 18,000 employees
is ahead. By 2010, we will have a reach of 35,000 employees in
India, making us the largest entity in the company," says
Baru Rao, CEO, Capgemini India. However, it must be said that
the us giants are much larger on a global scale, with Accenture
having a total workforce of 1.4 lakh all over the world, and EDs
a little over 1.17 lakh.
But the Capgemini-Kanbay deal isn't just
about headcounts. "First, financial services and the us markets
are two areas where Capgemini needs to develop its project services
and application management. Kanbay has a presence in both these
areas. Secondly, Capgemini becomes a significant player in India
and pulls well ahead of its European peers in offshore provision,"
says Douglas Hayward, Senior Analyst at it advisory firm Ovum.
In addition, Capgemini also ropes in two key clients, HSBC and
Morgan Stanley, from whom Kanbay earned 34 per cent and 11.6 per
cent of its revenues, respectively, in 2005.
This deal is also a landmark of sorts for
the Indian outsourcing industry. "This is the first case
of a European major in the it consulting and outsourcing space
making a large acquisition of a firm with a significant India
presence," says Ravi Shankar, Director, UBS Securities, which
was the advisor to Kanbay for the deal. Industry experts contend
that even though there is a lot of interest from Europe, acquisitions
in India are easier said than done.
"Most European it services organisations
are playing with the idea of making an acquisition in India, whether
it's in it services or in R&D/product engineering services.
Yet, considering the market caps of the main players, most European
firms have favoured organic growth," says Paris-based Dominique
Raviart, Senior Analyst, Ovum. Even in the Capgemini-Kanbay acquisition,
analysts agree that although the deal makes sound strategic sense,
it's nevertheless a costly one. Capgemini is paying $29 per share
in cash, representing a premium of 15.9 per cent to Kanbay's closing
price on October 25 and roughly three times Kanbay's 2006 revenues.
"Despite all the talk about talent shortage
in India, it's still easier to hire a few hundred people and train
them here rather than look at costly acquisitions. Moreover, outsourcing
is largely mainstream in the UK and is just about getting mainstream
in continental Europe," says Siddharth Pai, Partner at global
outsourcing advisors TPI. Nevertheless, industry watchers do not
rule out acquisitions by European majors in the near future. But
Raviart cautions that another European major Atos Origin, despite
its stated intention to grow in India, has struggled to find the
right acquisition target. "Logicacmg (based in the UK), meanwhile,
needs to go through a digestion period after the purchases of
Unilog (France) and wm-Data (Sweden)," Raviart adds. Capgemini's
India moves, however, might force the European outsourcing majors
to bite off some more.
AT&T is the first foreign player
with a long-distance licence.
fortnight's telecom moment was doubtless Bharti Airtel's entry
into the Rs 1 lakh crore-market cap club on the back of robust
subscriber addition in the second quarter of 2005-06. But what
went virtually unnoticed was the entry of the first foreign telecom
player in the long distance telephony segment. AT&T India,
in which AT&T holds a 74 per cent stake and Mahindra Telecommunications
Investment Pvt. Ltd the rest, has secured a licence to provide
national long distance/international long distance (NLD/ILD) services.
The company, through a statement, has said that it is initially
looking to serve the corporate enterprise market in India, which
includes sectors such as software and BPO. "Through these
licences and related government approvals, AT&T would provide
virtual private network services to the corporate enterprise segment
by the end of 2006," it adds. at&t will thus operate
in a market that VSNL and Reliance Communications have carved
out between themselves.
There is no indication on whether the company
will be a player in long distance services, which is the retail
side of the business, and which is nothing to sneeze at. The NLD
market in India for 2006-07 is expected to be about 75 billion
minutes, while that for ILD will be close to 12 billion minutes,
and together they're expected to be worth roughly over Rs 25,000
crore. The government, for its part, has made it extremely attractive
for players to enter the long distance market with the entry fee
for both down to Rs 2.5 crore. Compare this to the earlier figure
of Rs 100 crore for NLD and Rs 25 crore for ILD and it's easy
to see why AT&T is onto a good thing.
Merger or Acquisition?
Does a reverse merger or a predator await
|HDFC Bank's Aditya Puri
|HDFC's Deepak Parekh
a bank which Dalal Street likes most, which is reflected in its
price-earnings multiple (p-e) of 34, as against the industry p-e
of roughly 20. If HDFC Bank enjoys such rich valuations, there
are ample reasons for such investor interest: Its spreads are
one of the highest in the industry, and its non-performing assets
(NPAs) amongst the lowest. There are also a couple of factors
far removed from HDFC Bank's fundamentals that may be influencing
the private bank's high p-e: One of them is that rumour that refuses
to die: Ever since ICICI Ltd and ICICI Bank announced a mega-merger
five years back, Dalal Street has been speculating a reverse merger
of HDFC Bank with its parent, the home finance giant HDFC Ltd.
The other reason for the run-up in HDFC Bank's valuation is its
status as a potential target for acquisition by a foreign bank
post-2008, once (or should that be if) norms are relaxed to allow
for such consolidation. That Citigroup collectively holds 12.7
per cent in the parent, which in turn holds 20 per cent of HDFC
Bank's equity, adds fuel to the possibility of such a transaction
taking place. "HDFC Bank is clearly seen as a bank in play,"
says the CEO of a rival private sector bank.
Insiders at both the bank and the housing
finance major vehemently rubbish the chances of an HDFC-HDFC Bank
merger taking place, although the latest trigger for such speculation
last fortnight was a spate of 're-designations and salary revisions'
at the 10-year-old bank. "A merger doesn't make any sense
if there is no forbearance in the CRR (cash-reserve ratio), SLR
(statutory liquidity ratio) and priority sector lending requirements,"
says a source in HDFC. Analysts watching the bank, however, make
a strong case for such a union, but only if RBI doles out such
If a merger does take place, HDFC, with a
balance sheet size of Rs 56, 496 crore, will have to comply with
requirements of CRR at 5 per cent, SLR at 25 per cent and also
priority sector advances at 40 per cent. In fact, the entire balance
sheet of the 29-year-old financial conglomerate will come under
the scrutiny of banking regulations if a merger is proposed. And
then, as the source adds, "we will also have to comply with
RBI's rules for realty advances for banks".
Analysts conjecture that if the merger doesn't
take place, an acquisition might just go through post-2008, and
Citigroup might just be the predator. Other than a stake in the
bank, HDFC also has securities and insurance (life and non-life)
subsidiaries. In fact, even before 2008, Citi could purchase more
shares in HDFC (perhaps till just below the 15 per cent threshold,
at which an open offer is triggered) as guidelines do not prohibit
a foreign bank from acquiring a non-banking finance company. With
possibilities galore, the ball is indeed in the court of RBI Governor
V.Y. Reddy. If Reddy makes encouraging noises about making the
HDFC Group a universal banking behemoth and accompanies those
noises with a relaxation in the stringent SLR requirements, a
merger might just materialise after all.
VCs and PE firms are mopping up stakes of
nurtures start-up, venture capitalist (VC) enters to fund start-up,
start-up lists on stock exchanges, venture capitalist and entrepreneur-not
necessarily start-up-live happily ever after. That may be a typical
pattern of how the relationship between a promoter of business
and a venture capitalist flourishes, but there are always variations
to the plot. Like, for instance, the recent trend of venture capitalist
and private equity (PE) players acquiring stakes in companies
already listed. As on September 30, the holdings of venture capitalists
and PE firms of over 1 per cent via the secondary market had crossed
Rs 4,000 crore.
Says M. Shankar Narayanan, Managing Director,
The Carlyle Group, a private equity major: "In India, companies
pre-maturely go public. We feel many of these listed companies
have still not grown to their potential and our investment and
relationships across the globe could provide true value to these
companies and act as catalysts for more profitability. It's a
win-win situation for both." Over the past three-four months,
there has been a spate of such "win-win situations".
Actis (spun out of CDC Capital) bought a 14 per cent stake in
listed entity Phoenix Lamps for $9.5 million, and ChrysCapital
bought 4.7 per cent stake in Centurion Bank of Punjab for $30
million. ICICI Venture Funds bought a 7.5 per cent stake in Action
Construction Equipment. Citigroup Venture Partners bought a 4.5
per cent stake in Elder Pharma. Similarly, Vinod Khosla's venture
fund, Khosla Ventures, bought 10 per cent in Praj Industries at
$26 million and Anil Ambani's Reliance Capital Partners bought
14.55 per cent for $10 million in Maxwell Industries.
What may hasten the process of venture capitalists
taking the secondary market route are recent guidelines from the
Securities & Exchange Board of India (SEBI) that make a one-year
lock-in of venture capitalist investments mandatory before an
initial public offering (IPO). But S. Ramesh, Executive Director-Investment
Banking, Kotak Mahindra Capital Company, does not think the regulator's
new norms will have a major impact. "Venture firms and private
equity players are buying through the secondary market because
they are sure of finding value in listed companies over the next
three-five years. Secondly, in cases where promoters aren't willing
to sell or dilute their stakes, venture capitalists and private
equity players have little choice but to acquire stakes from the