Business process services (BPS) pure-play Genpact is paying $550m in cash to acquire US-based Headstrong, a fast-growing capital markets BPS specialist. Genpact will fund the acquisition through existing cash reserves and debt, and expects to close the deal on 31 May 2011. Genpact is paying a premium of 2.5 times Headstrong’s FY10 revenue of $217m - this was up 28% on FY09 (all organic by the way). And although profitability was not disclosed, CEO Pramod Bhasin maintains that the deal will be accretive to Genpact’s FY11 GAAP earnings (and after amortisation costs). Bhasin also expects Headstrong to deliver long-term growth in excess of 20% per year. This is some way higher than Genpact, which grew 12% in FY10 (see Genpact shows BPS is the place to be!). Investors were certainly pleased, as Genpact’s shares rose 5% following the announcement.
Genpact will retain Headstrong as an independent unit, and there are no plans to integrate operations or cut costs – as Bhasin pointed out, this is a “growth story”. Rather the focus seems to be in the two companies using their combined scale and resources to cross-sell and up-sell into new and existing banking and financial services accounts.
Headstrong specialises in capital markets sub-verticals, such as asset management, derivatives, wealth management, prime brokerage, reference data, compliance and mortgages. It provides these services around its own Tradeport and Stride trading and iceFish post-trading platforms. We think platform-based BPS is the way forward for BPS providers, and no doubt it has helped Headstrong develop a certain degree of lock-in with existing customers, as well as bring new ones on board – hence the strong growth profile. The company also has a fledgling healthcare practice, focused primarily on the pharmacy sector, which generates c10% of its revenue. So Genpact will also be keen to exploit opportunities through its own healthcare division.
Headstrong will add some 3,700 people to Genpact’s 44,000, of which approximately half are based out of offshore delivery centres in Manila, Noida and Bangalore. However the company also claims to generate “a significant amount of revenue from employees who are onsite with clients in the United States, the United Kingdom and Japan”. It also claims to have "nine of the world's top ten investment banks and three of the top five asset managers" as clients.
For Genpact the deal is about becoming more specialised within its chosen verticals. Banking, financial services and insurance (BFSI), is already Genpact’s largest vertical (39% of its FY10 revenue), and we estimate that Headstrong should bring that figure up to c50%. It should also see the percentage of revenue it gets from former parent GE reduced by 8-10 percentage points, to c28-30% of total revenue. In FY10 it stood at 38%, which is very high for an independent player.
As Genpact moves further away from ‘generic’ BPO into industry-aligned BPS, it is going to be competing far more against a new set of competitors - global services giants with strong BFSI credentials such as Capgemini (which bought offshore financial services specialist Kanbay in 2007), HP, Accenture and IBM, who aren’t likely to sit back and let Genpact eat their BFSI lunch. Genpact will need to be seen as a strong, independent player able to compete on level terms with the big boys. Bhasin said that Genpact is considering further acquisitions. Certainly that would do something to further water down its reliance on GE, and alleviate any concerns that it still piggy-backs its former parent.