Best of Both Worlds – Sell and Continue to Receive Services

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.

About the author

Dinesh is a highly experienced and well-respected advisor in the outsourcing industry with more than 23 years of experience in management consulting and outsourcing. He works with enterprises to craft sourcing strategies, structure and negotiate complex sourcing transactions and design and implement sourcing governance organizations. Prior to joining ISG, Dinesh worked with Infosys and Accenture, where he led large transition programs and consulted on IT strategy and implementations, business process-reengineering and operational improvement programs. He is a published thought leader and a regular speaker at industry conferences. Dinesh manages the ISG India Business.