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An Unexpected Acquisition

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The shoe, it appeared, was actually on the other foot. After weeks of speculation that HCL Technologies will buy 50 per cent stake in EXLService Holdings, it turns out that EXL has spent $91 million in acquiring a smaller business process outsourcing firm. When it announced its first quarter results on Wednesday, EXL said it will buy its competitor Outsource Partners International (OPI), a finance and accounting (F&A) services provider.

The deal, which is expected to be accretive to earnings in 2011, makes EXL's presence stronger in areas where it had marginal presence. F&A is a very large market — $17 billion — and is growing very rapidly.

"We wanted to specialise in the category," says EXL's president and CEO Rohit Kapoor. "We believe you need to be a category killer and you really need to have deep domain expertise in every area you operate in to be competitive."

Market chatter about a buyout talk between HCL Technologies and EXLService has been rife late last month, that investors like Oak Hill Capital Partners and certain affiliates who own about 36 per cent of EXL's stock, and BlackRock, which owns about 11 per cent, were looking to sell out. HCL Technologies was considered a potential buyer.

Nasdaq-listed EXLService has denied all the rumours. HCL refrained from commenting on any market speculations. In a letter to its employees, EXL said "there is absolutely no truth to such reports", referring to a number of stories that appeared in the media about some of the company's stockholders and private equity partners preparing to make strategic exits.

So, were the companies under the scanner without any reason? Experts suggest that amongst all IT services comapnies' BPO arms, HCL Technologies has not delivered a compelling BPO story; an acquisition at this stage would make sense for the company. The firm's BPO business accounts for about 8 per cent of its total revenue. HCL Technologies' revenues were roughly Rs 12,136 crore for the year ended 30 June 2010.

"I do not think HCL will be looking at any more acquisitions," says Srishti Anand, analyst with Angel Broking, a securities firm. "It is still trying to integrate the acquisitions it made in 2008." In 2008, HCL made two acquisitions in the BPO segment — Liberata Financial Services, a UK-based financial service provider, and Control Point Solution, a telecom expense management company.

The story for EXL is different. It has been touted as a buyout target before. With a market cap of about $710 million, it posted revenues of $252.8 million for 2010. For the first quarter ended 31 March 2011, EXL reported a 33.8 per cent jump in revenues to $72.9 million above last year's first quarter. Net income grew 50 per cent to $8.4 million. But it has been viewed as a potential acquirer, too.

The company's growth has been outpacing that of its competition. WNS saw a 2.5 per cent decline (to $94.3 million) in its revenue (non-GAAP) for the quarter ended 31 March 2011, due to lower volumes and lower pricing terms with one of its large travel clients.

EXL has also been grabbing important deals. During the first quarter it won two new clients in outsourcing services and two new clients in transformation services, including selection by a US bank to provide a range of outsourcing and transformation services.

With the current acquisition of OPI, EXL has created a strong case for growing as an independent company. In March this year, the company indicated that it continued to have a strong pipeline of acquisitions, focused on adding processing capability in niches where it can look to expand its delivery footprint.

EXL will continue to look at acquisitions, says Kapoor, preferably in domains like banking and legal services. And analysts size up this appetite at about $50 million or more in size.

(This story was published in Businessworld Issue Dated 16-05-2011)