Best of Both Worlds – Sell and Continue to Receive Services

This week I have another guest blogger from TPI, Dinesh Goel, Project Director...

An interesting trend kicked off when GE made one of its largest transactions almost three years ago. The company decided to exit the majority ownership of its fully owned captive subsidiary, GE Capital International Services (GECIS), at an enterprise value (which includes the acquired company’s debt as well as its cash and other holdings) of approximately $1 billion.

In the last 12 months, the media has reported several other similar transactions with the most recent being the buy out of Phillips captive centers across three countries by Infosys BPO. With the growth and maturity of the commercial outsourcing (and offshoring) market, parent organizations of captives have been actively considering divestment as a feasible option.

Many organizations established their offshore captives in locations – such as India - in response to the lack of reliable and matured service provider capabilities at the time, as well as perceptions regarding the risks of using third-party providers.

But the growth trajectory of offshore outsourcing during the past five to six years has resulted in the availability of a far more mature marketplace in which service providers can deliver what wasn’t considered feasible in the past and at a potentially more attractive cost-value equation. Additionally, most leading service providers currently are in a race to grow their capabilities in new areas and acquire scale to build the muscle needed to become serious contenders in large-sized sourcing transactions.

These two factors in play are compelling the managements of parent organizations to give the option of divestment serious thought.

The activity in the marketplace has been further intensified by the presence of several large private equity players who view this as a high-growth industry that can deliver significant return on their investments.

My take on this trend: Most scale related acquisitions of captives will have a limited runway that likely will not extend beyond the next two years for a reasonable (or more than reasonable) valuation. While captives that are providing services in specific niche areas (such as engineering services, R&D, analytics) will continue to enjoy high multiple valuations for a much longer period of time (given that the market is still at nascent stages), other captives will see diminishing interest from suitors over time.

Of course, this is also expected to vary by region, given that the evolution and presence of providers is geographically varied. For instance, captives in Latin America or Eastern Europe may yet have more time on their hands for such a decision before they see diminishing interest (and hence price) compared to their counterparts in India.

Our detailed point of view on this topic can be accessed at  http://www.tpi.net/pdf/pointofview/TPI_POV_Monetization_of_Captives.pdf.