Hinduja Global Solutions, a business process outsourcing company with Rs 1,070 crore revenues in 2010-11, has acquired On-Line Support Inc, a Canadian outsourcing company. It will pay Canadian $74.85 million dollars or about Rs 350 crore to acquire On-Line, giving it a business with about Rs 295 crore in revenues in 2010-11. This is a significant acquisition for Hinduja Global, as this acquisition would have added about 28% to its revenues in 2010-11, notionally speaking.
The company statement does not mention anything about profit margins and On-Line Support is a privately held company so there is no financial information available on the company. But the deal’s valuation, at about 1.2 times its 2010-11 sales, does imply that On-Line is running a profitable operation.
One benchmark would be Hinduja Global’s own valuation, which is relatively low at 0.7 times of sales. By that count, one would expect On-Line to be more profitable than Hinduja Global which had earned an operating profit margin of 14.4% during 2010-11.
Hinduja Global provides back office processing, contact centre services and customised IT solutions through its existing network spread across India, USA, Philippines, Mauritius and UK. It gets its revenues from four main geographies, with 36% of revenues coming from North America, 31% from India, 21% from Manila (Philippines) and 12% from the United Kingdom.
On-Line Support will bring with it not just revenues, but also a customer base which a press statement says comprises marquee clients in sectors such as telecom, media, BFSI (banking, financial services and insurance), and technology.
Hinduja Global believes the two companies can cross-sell services to their respective customers and up-sell –that is provide more sophisticated services- to existing clients. Being able to get more business from existing customers will help them get maximum benefits from the combination.
A lot depends on how they manage the cultural integration. Hinduja is no stranger to acquisitions and that should help it manage this one better. Also, the existing management team is being retained, which should help.
On-Line support has a network of 10 centres in Canada, with about 1,650 seats and about 1,800 employees. It also has a delivery network in rural Canada. It can benefit from getting access to Hinduja’s global delivery network.
Hinduja Global expects the synergy to be most visible in telecom, where the two companies are said to have complementing capabilities. Telecom and technology together contributed about 26% to Hinduja Global’s sales during the March 2011 quarter. Hinduja Global could also offer a broader portfolio of French language offerings to its existing clients, according to a statement.
Hinduja Global’s cash balance as of 31 March 2011 was Rs 619 crore, giving it adequate cushion to fund the acquisition without raising debt. Its share was up by 2.6% on the BSE at the time of posting. The sizeable addition to its revenues would have buoyed sentiment, but it also assumes that the acquisition is earnings accretive. While the valuation appears to indicate so, one will know only after On-Line Support’s financials are consolidated with Hinduja Global’s, in the coming quarters.