MID CAP PLAYERS (market capitalisation $ 50~ 600 million) - Continued from last week.

For mid-cap companies, posting revenue growth higher than the sector average has been a big challenge. If revenue growth slackens, the operating leverage (linked to higher offshore employee utilisation and lower selling and administrative expense) goes awry.

The attempt by these companies to build differentiation in specific verticals such as banking/ financial services or telecom has also been slower than the frontline peers. And, finally, with margin growth almost 5-10 percentage points lower than the majors, the drivers for earnings growth are not firmly in place. Moreover, the promoters of select mid-cap companies may also not be willing to shed their equity stakes in a hurry.

For mid-sized multinational vendors, these margins are still quite attractive. However, as the risks of integration of these acquisitions are fairly high, they may be reluctant to pay the substantial premium for control for complete buyouts.

There is considerable diversity in the returns notched up by mid-cap software stocks in 2005. MphasiS BFL, Hexaware, Geometric, iGate Global, KPIT Cummins, NIIT Technologies, Polaris Software and Zensar Technologies were relative under-performers in a bullish market. At the other end, niche stocks such as Subex Systems, Cranes Software, Geodesic, Nucleus Software and Megasoft, or stocks with sharp turnaround or restructuring stories, such as Infotech Enterprises, VisualSoft, Sonata Software, Mastek or Aztec Software, were stellar performers. Dogged by weaker performance, it is the former set of stocks that is likely to be the focus of consolidation.

In this backdrop, probably selective `strategic equity stake sale' by companies such as NIIT Technologies, Ramco Systems, Geometric Software iGate Global or Polaris Software may happen to some of these multinational vendors, paving the way for a buyout later.

Moreover, high profile private equity firms such as Blackstone, Carlyle, Temasek, Warburg Pincus or WestBridge Capital have been scouting the mid-cap Indian IT space for attractive acquisition opportunities. This has perked up valuations in the domestic Tier-II services space.

Several private equity deals are said to be in the pipeline. The legendary LBO (leveraged buyout) firm, Kohlberg Kravis Roberts & Co. is believed to be in talks with Flextronics Software to take an equity stake in the company.

It is also rumoured that Blackstone has been eyeing Baring India Private Equity's 35 per cent equity in MphasiS BFL, after the latter failed to sell this equity stake through a bidding process in May 2005. And, with the competitive bar raised by private equity, it is likely that other MNC vendors may also consider a buyout of MphasiS. In the earlier round of bidding for sale of equity stake by Baring in May last year, Temasek and Hinduja TMT had reached the final rounds, with Cap Gemini and Carlyle involved in the earlier rounds.

Some of the recent acquisitions

- In early August, Citigroup Venture Capital, promoter of i-flex solutions, a high-profile company in the banking products arena sold its 43 per cent equity to Oracle Corporation, US for Rs 2600 crore ($ 593 million). Oracle followed this with an open offer for 20 per cent equity at Rs 882.62, which failed to mop up any equity stake.

- In the same month, Flextronics Software (formerly Hughes Software) put through a buyback using the reverse book-building route to buy out the remaining 30 per cent non-promoter equity at a price of Rs 725 per share (approx $ 16) This was significantly higher than the floor price of Rs 575 (approx $ 13.4) fixed by the company. Using a combination of open offer and secondary market purchases, the company notched up nearly 94 per cent of equity by December. It recently indicated that it will be suspending trading in the stock at the NSE from February 3, 2006.

- In mid-August, SAIF-II Mauritius, an offshore arm of Japan's Softbank Corp, took a strategic equity stake of 14 per cent from the promoters of Hyderabad-based VisualSoft Technologies. A month later, Venture Tech Solutions, promoted by Mr Sandeep Reddy and Chintalpati Holdings, held by Mr Srini Raju, acting as portfolio investors, took a combined 8.6 per cent equity in this exercise. In a bid to restructure the operations of VisualSoft, these equity funds brought AppLabs Technologies and eSolutions to the negotiating table. Since then, VisualSoft has decided to merge these two companies with itself and focus on the high-growth areas of outsourced product development and testing.

Thus, 2006 is likely to be Action Packed and PRGL shall continue to bring you the latest happenings in the Outsourcing arena to your Desktop.

 Top Stories

TMT Trends: Predictions, 2006 - Offshoring evolves from option to obligation
2006 may see offshoring become an important strategic issue – defining at least some of the difference between success and failure. Technology companies who make active and dynamic use of offshoring for more than just the basics are likely to see numerous benefits – including the assimilation of market knowledge in important emerging markets such as India and China, as well as the accumulation of a new body of intellectual property, and indeed, intellectual horsepower. Companies who shun offshoring may, in the medium-term, struggle to find effective means to reduce costs permanently, and to identify new paths to growth. In some sectors, offshoring may well evolve from being an exceptional practice into a prerequisite for survival.

Latin America is attracting U.S. companies needing cheap white-collar labour.
In call centres alone, according to Zagada Markets, roughly 33,000 people work as operators throughout the Caribbean -- answering questions about XM satellite radio, wired money from Western Union and Colonial Penn life insurance. Procter & Gamble, Hewlett-Packard and Sykes use Costa Rican offices for accounting, personnel and other back-office services. The numbers still pale compared to outsourcing magnets like India (not to mention Eastern Europe, the Philippines, and Canada). But call centres -- the best-tracked segment of the outsourcing industry -- have grown an average of 54 percent a year in the Caribbean since 2002, according to Zagada Markets. Central America will increase its call-centre jobs 34 percent by 2008, according to research firm Datamonitor.

Utilities giant extends business process outsourcing deal for greater efficiencies
Thames Water, the world's third largest water company, has renewed its contract with outsourcing and technology expert Xansa for the delivery of its back-office billing exceptions and customer correspondence processes. The move comes as the utilities company continues to push for excellent customer service and greater efficiencies.

Barclays awards €200m deal to Getronics
Barclays has awarded a five-year, €200m deal to IT services firm Getronics for desktop and application management to over 30,000 users. In September, Barclays said it was reviewing a seven-year, $350m (£190m) desktop migration deal signed with EDS in 2003.

GM awards US$7 billion in IT outsourcing contracts
General Motors Corp. Thursday awarded IT contracts worth approximately US$7 billion over five years to six vendors, including Electronic Data Systems Corp., which is now responsible for most of GM's IT operations, as well as IBM Corp. and Indian offshore firm Wipro Ltd. The other winners of outsourcing deals from the automaker are Hewlett Packard Co., Capgemini and Covisint, a subsidiary of Compuware Corp.

Fortum to purchase payroll management services
Fortum a leading energy company in the Nordic countries and the other parts of the Baltic Rim to purchase payroll management services from Personec in Sweden and Norway.

Allied Irish Bank selects i-flex Solutions to reengineer its wholesale banking operations
According to the deal, i-flex will replace the bank's existing systems with FLEXCUBE to enable unified processes across its wholesale operations including access to its products and services for customers on the Internet.

Clinical Research Organizations Expand Speed and Capacity of Pharmaceuticals' Product Development Pipeline, Tufts Study Finds
According to a recent study by the Tufts Centre, drug developers who outsource through the contract research model tend to complete their projects faster while delivering comparable quality compared with those who employ CROs minimally. The study was based on an analysis of 83 new drug and biologic license applications submitted to the US Food and Drug Administration (FDA) between 2000 and 2005. The study reveals that the drug sponsors who contract services from the CROs extensively are likely to complete their projects in the stipulated study close-out period. The data put forth in the report states that in 2004 nearly 23,000 Phase I-IV research studies at 152,000 clinical sites worldwide involved the contract services of the CROs. It also found that USD 5.5 billion, 15 percent of global drug development spending, went to contract clinical services in 2004.

 Service Provider News

Call centres in India it’s no longer about being American.
Despite the rising number of voice-based business process outsourcing (BPO) companies, the initial enthusiasm for training employees in American, British and European accents seems to have died down. More and more call centres are now shifting focus to getting the job done and queries answered effectively rather than getting the accent right. Companies now provide training in pronouncing the words correctly, phonetics and importantly on neutralising the accent. In other words, taking care of the mother tongue influence. The stress is on grammatical correctness, accurate sentence construction and a sense of vocabulary.

Small cities to call shots in BPO growth in '06
It’s not cybercities like Bangalore, Hyderabad or Pune that will fuel the BPO-KPO boom in ’06. Smaller cities—the likes of Jodhpur, Mohali, Nagpur, Patiala, and Madurai in India are set to emerge as attractive destinations for outsourcing. Various Indian state governments along with the Software Technology Park of India (STPI) are developing IT and software parks with state-of-the-art infrastructure to woo companies to set up shop in smaller cities

First Consulting Group (FCG) to Implement Core Administrative System for PacificSource
FCG announced a two-year, $9.2 million systems implementation engagement with PacificSource Health Plans, a 152,000 member health plan located in Springfield, Oregon. FCG will support the implementation and integration of a new core administrative system for PacificSource that will automate transactions and is expected to improve productivity, increase information transparency, and support member-focused initiatives.

EMC bags BT deal for MPLS monitoring
EMC Corporation, provider of information management and storage solutions, said that it is in a deal with BT Global Services to monitor the performance and availability of its MPLS (Multiprotocol Label Switching) network.

CGI selected by OneBeacon Insurance Group for business processing services
CGI will provide OneBeacon with business processing services (BPS), including policy administration, and CollaborativeEdge, a front-end solution for Massachusetts personal lines agents to streamline data-capture activities.

ACS receives $ 56 million Aetna Deal
Aetna has extended its contract with ACS by three and a half-years. The services covered under the deal include document preparation, imaging, storage, management, and retrieval services for medical, dental and disability. Under the terms of the new contract, ACS will provide support services for the enrolment, claims, dental, correspondence, and group insurance segment of Aetna's business.

CSC to open Innovation centre in India
Computer Sciences Corporation has announced that it is establishing a strategic innovation centre in Noida, India. The company's innovation centre in India is one of the three to be established outside the US.

Accenture to double staff in India, China, Philippines
Accenture Ltd. plans to more than double its staff in India, China and the Philippines from 24,000 currently to about 50,000 over the next three years, the company said Tuesday. Of the 24,000 people currently employed in these three countries, 16,500 are based in India, according to a spokesman for Accenture in India. Around 10,000 of the employees in India are in IT services, 5,000 in BPO (business process outsourcing) and the rest in consulting for the Indian market and corporate functions.

Sutherland to invest Rs 120 Crore for BPO facility in Kerala
A company statement said. they would create service delivery centre and training infrastructure on 20 acres of land in Kochi, Kerala. The company expects to hire 3,000 professionals over the next three years in the first phase for its Kerala operations,

American Capital Invests $93 Million in Two Portfolio Companies
One of the investments involved an American Capital-sponsored buyout of SAV Holdings Inc. ('SAV'), the nation's second largest outsourced provider of audio visual equipment and related technical support services to hotels and resorts. The other investment was in H-Cube Inc., a portfolio company of GTCR Golder Rauner LLC. H-Cube is the parent company to Zenta Global Ltd., an existing American Capital portfolio company and a U.S.-based leader in high quality business process outsourcing ('BPO') services.