The Nearshore Beckons  

20 January 2010:

Recent Latin American and Caribbean acquisitions by Miami-based ACS, one of the leading business process outsourcing companies in the Americas, and the subsequent US$6.4 billion takeover of ACS by Xerox, has focused the spotlight on the nearshore outsourcing industry. Rough estimates of regional mergers and acquisitions exceed US$550 million over the last 36 months.

The frenzy of activity underscores a rapid expansion of the outsourcing industry throughout Latin America and the Caribbean, with an estimated 300,000 workers engaged in business process outsourcing (BPO) driven by international clients. We estimate that 1,000 BPO jobs have an economic multiplier effect of approximately US$25 million. Thus, the 300,000 internationally driven BPO jobs have an annual economic impact of US$7.5 billion.

Mexico, Argentina and Chile are the key markets engaged in international BPO outsourcing in Latin America, with 90% of the demand coming from the U.S.  Some 130,000 BPO agents from Mexico, Argentina and Chile serve U.S. and other international clients. The Caribbean is projected to exceed 100,000 BPO jobs by the end of 2010, an almost tenfold increase since 2002. In Central America, the number of jobs will reach 68,000 in 2010, up from 47,000 in 2007.  Brazil’s BPO market, meanwhile, is principally an internal market with only its IT outsourcing providers serving U.S. and global clients.

While the leading narratives behind the recent wave of mergers and acquisitions have been the expanding job growth in nearshore outsourcing and the major contract awards won by both locally-owned and international service providers in Latin America and the Caribbean, insights into the M&A subplot offer a more complete analysis of nearshore outsourcing dynamics.

Before we take a look at the leading industry players and where the M&A action is happening, let’s first define what we mean by nearshore outsoucing and the geographic scope of the analysis. While the term “nearshoring” encompasses the outsourcing of activities in all of the Americas, our focus is on Latin America and the Caribbean.

Also, let’s define the kind of outsourcing activity we are dealing with. While, Brazilian IT firms, such as Stefanini and CMP Braxis, Mexican IT operators, such as Neoris and Softtek, and Argentina-based Globant and others are indigenous brands making global IT outsourcing (ITO) plays with strategic acquisitions in China, the U.S. and Eastern Europe, acquisitions of Latin American IT outsourcing assets by foreign firms are virtually non-existent. Instead, M&A activities have centered around business process outsourcing (BPO) transactions. BPO firms are characterized by two key dimensions: voiced based BPO (call centers) and non-voice BPO (back office, data processing, finance and accounting, or shared services).

Now to the geographic scope of recent M&A transactions: 13 deals merit our attention. These transactions involved three South American markets (Argentina, Colombia, Peru), four Central American markets (Costa Rica, Panama, El Salvador, Nicaragua); and four in the Caribbean (Jamaica, Dominican Republic, St. Lucia, Barbados). Eight U.S. firms and one French buyer executed these transactions. They include: ACS, Sykes, NCO Group, KM2, Concentrix, Stream Global Services, Teleperformance, H.I.G Capital and Eton Park Capital. With the exception of Eton Park and H.I.G Capital, which are private equity firms, the buyers are operating companies in the outsourcing sector.

The target companies were all the products of local entrepreneurs, who had grown their businesses with sweat equity, local capital and some U.S. venture capital participation. A preponderance of revenues were driven by English-speaking contracts from U.S. corporations. Secondary revenue streams came from four additional segments: U.S. Hispanic, Spanish-language local in-country business, pan-Latin America assignments and Spain-to-Latin-America contracts. All of the acquired firms were private entities. As a result, most transaction details were undisclosed, with only a few exceptions. Our insight into the operating dynamics of the industry suggests that firms generated transaction multiples between 1.5 to 2.0 times revenues. On average, a 1,000-seat BPO call center generates $15-$20 million in gross revenues. Margins in the sector range between 7% and 15%.

ACS was the single most aggressive buyer over the last 36 months.  Xerox then purchased the company in a stock transaction valued at $6.4 billion last September.  That acquisition came on the heels of HP’s $13.9 billion acquisition of EDS and Dell’s $3.9 billion purchase of Perot systems, reflecting an emerging consolidation in the sector. Some Indian IT firms such as Infosys, Tata, and Wipro, with a presence in key markets such as Mexico, Brazil and Argentina, have also launched their own BPO units and some are on the hunt for local BPO acquisitions. Genpact’s 2009 acquisition of GE Money’s Guatemala center is perhaps the first of many Latin American BPO purchases by Indian firms.

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Source: Philip Peters - Kroll Tendencias

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