Capgemini's Rao: Racing ahead

It's 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.

Good Morning India
AT&T is the first foreign player with a long-distance licence.

Last 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.

-Krishna Gopalan

Merger or Acquisition?
Does a reverse merger or a predator await HDFC Bank?

HDFC Bank's Aditya Puri

HDFC's Deepak Parekh

It's 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 concessions.

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.

-Anand Adhikari

Binge Investing
VCs and PE firms are mopping up stakes of listed companies.

Entrepreneur 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 secondary market."

-Mahesh Nayak