Expect More to Come - Acquisition of Client "Captive" Centers by BPO Companies

Cognizant (NASDAQ:CTSH) acquired UBS’ Indian Subsidiary for $75 million - the former UBS India division supports UBS around the globe with Knowledge Process Outsourcing (KPO), Business Process Outsourcing (BPO) and IT Outsourcing (ITO) and employs 2,000 people in India.

As part of the deal, UBS signed a 5 year $442 million service agreement with Cognizant.

This "Captive Spin-Off" Approach is tried and true approach in outsourcing and a large number of similar transactions are currently in progress around the world.

Spinning of a client owned share service center (a "Captive SSC") is a classic model for growing a BPO business.  Most of today's leading BPO providers used this technique at one time or another in their growth models.  Some similar transaction in the past include:

1. Warburg Pincus creating WNS (NASDAQ: WNS) by spinning off British Airway's SSC in India ("WNS actually stands for "World Network Services" which was the name of the BA Unit);

2. eXL Services  creation with Conseco Insurance (NYSE:CNO)'s back office in India, 

3. General Atlantic and Oak Hill Partners creating Genpact (NYSE: G) with by spinning off GE (NYSE:GE)'s captive units around the world (most notably India and China);

4. OneResource Group (later purchased by Capgemini) spinning off Dairy Farm International Holdings operation in China, 

5. Savista (later acquired by Accenture) with Yum! Brands (NYSE:YUM) in USA, 

6. Capgemini creating Capgemini Energy (EPA:CAP) by spinning off TXU Corp's back offices in Texas

7. General Atlantic creating Exult (later acquired by Hewitt (NYSE:HEW)) with a carve out of back-office from BP North America.

Over the last 24 months some high profile transactions, including the Citigroup (NYSE:C) sale to TCS have renewed interest in spin-off's. 

The UBS deal was transacted at a relatively attractive price for Cognizant who paid a significantly lower on a “price per head” basis than the $505 million paid by TCS for Citigroup Global Services last year.  The deal also helps Cognizant move from its ITO roots into the BPO and KPO markets - precisely the areas where global outsourcing firms now depend upon for growth.

Expect a wave of similar transactions to follow - as these aging Captive SSC's look for step change at a time when their owners are more eager than ever to covert these assets into cash. At the same time the IT Outsourcing providers have seen their historic 20%-30% CAGR evaporate and are now looking for new ways to grow.