The Nearshore Beckons
 

A wave of mergers and acquisitions in the outsourcing industry from Argentina to Guatemala underscores a boom in nearshoring by U.S. multinational companies, a business that is expected to continue to grow annually at double digits to over $20 billion by 2013.

Philip Peters, Miami 


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.

ACS has a regional footprint covering all geographic nearshore segments and has a long history in the region. Its 2008 acquisition of Argentina-based Grupo Multivoice was followed up in 2009 by the purchase of e-Services group in Jamaica. e-Services was acquired for $85 million while the Multivoice transaction value was undisclosed. Both companies were founded by local entrepreneurs -- Patrick Casserly (e-Services) and Gustavo Barrionuevo (Multivoice). At the time of the transactions, e-Services’ annual sales were $65 million, driven by its 4,000 agent workforce, while Mutivoice’s annual revenue topped $40 million with 6,000 workers. 

Another significant 2009 Latin American deal was the purchase of Bancolombia’s BPO subsidiary Multienlace, Argentina’s Actionline Cordoba and a smaller Peruvian contact center by a group of U.S. investors lead by Eton Park Capital Management, a U.S. private equity firm. Eton Park subsequently rebranded the three entities under the single Allus brand. The deal was consummated after Bancolombia agreed to sell its 100% interest in Multienlace to Stratton Spain for $63 million. Stratton was also a shareholder in Actionline Cordoba. Close to 15,000 agents now work for the rolled-up firm, which offers a full range of BPO solutions to both North America and Europe (principally Spain). Allus estimates 2009 revenues at $145 million.

Colombia has also recently benefited from Teleperformance’s December 2009 acquisition of Teledatos, another leading local BPO operator with over 6,000 workers. The exact terms of the deal were not disclosed. In mid-January, Teleperformance announced another expansion with a new center in San Jose, Costa Rica. The firm is headquartered in France and has nearly 50 BPO centers worldwide.

Noteworthy Central American transactions included NCO Group’s purchase of Panama’s 2,600-seat BPO operation Star Contact, and H.I.G Capital’s purchase of National Asset Recovery Services’ (NARS) centers in Panama and Jamaica. With the backing of its new U.S. parent, Star Contact has recently expanded into Guatemala. Prior to its Star Contact acquisition, NCO Group acquired Outsourcing Solutions Inc (OSI) for US$325 million in cash. H.I.G. a Miami-based private equity firm, facilitated its NARS transaction through its Reprise Management joint venture arm, formed in April 2009 with veteran industry specialist Tim Bauer. 

It should be noted that while Guatemala has not attracted any significant M&A transactions, apart from the Genpact/GE Money deal, the country is spawning a growing a number of scalable local operators such as Transactel and Accent BPO.  Atento, Telefonica’s BPO subsidiary, also has a strong presence in Guatemala and across the major markets in the region. With Transactel approaching its 4,000 agent-worker capacity, some analysts say it represents an ideal acquisition target. The company has centers in two Guatemala cities, in El Salvador and in Panama. 

Like Barbados and Costa Rica, El Salvador is not defined by its entrepreneurial flair. The market, however, appears to be defined by a good BPO management ethic. The singular deal defining its sector was Stream Global Services’ acquisition of Dell’s 2,000-plus-seat operation. Dell’s exit from El Salvador was part of its cost-cutting strategy to return to profitability, driven by the return of company founder Michael Dell to the CEO helm. Stream’s acquisition of the El Salvador site follows several international acquisitions by the company, including call centers in the Dominican Republic, Costa Rica and Ireland. The terms of the El Salvador transaction were not disclosed. 

Two additional Central American transactions of note, though smaller in size, in were Concentrix Corporation’s investments in Nicaragua-based Intelligent Outsourcing and Costa Rica-based Occidental Business Services (OBS).  Concentrix is a wholly-owned subsidiary of SYNNEX Corporation. While Costa Rica generates over $5 billion in outsourcing revenues, most are generated by captive shared services BPO activity done by well-established brands such as Procter & Gamble, Fujitsu, HP and Intel. The market has demonstrated a seasoned maturity in attracting companies to its shores. On the entrepreneurial front, though, it has spawned more local IT success stories than indigenous BPO operations.

In addition to the ACS/e-Services transaction in Jamaica, and the NARs HIG/Repise deal earlier mentioned, KM2 is the other U.S. operator engaged in acquisitions in the Caribbean.  KM2’s strategy is defined by a small-island/high quality boutique acquisition approach. The company purchased ICT Group’s Barbados center, and subsequently acquired St. Lucia-based Helen IT. The company has recently launched a new center in Grenada. KM2 anticipates a 1,000-agent workforce by the end of 2010.

The nearshore begins the decade with solid credentials and huge growth potential buttressed by an annual $1 trillion in consumer spending by the U.S. Hispanic population, which is projected to exceed 50 million by 2012, as well as the strategic decision by U.S. global suppliers to include the nearshore in their delivery footprint.  This augurs well for small and mid-size local BPO firms and their investors, who can expect plenty of international suitors to come calling. It also suggests that the recent acceleration in nearshore M&A transactions will soon translate into similar opportunities for IT outsourcing companies throughout the region.
   
The author: Philip Peters ( philp@zagada.com ) is Founder & CEO of Zagada Markets, a business development analytics firm focused on global outsourcing. Zagada principally serves buy-side clients and publishes NearshoreJournal.com , a leading blog on the sector. Peters was recently appointed to serve on the High-Level Panel of Advisors of the United Nations’ Global Alliance for Information and Communication Technologies and Development (UN-GAID).