Back-Office Outsourcing Makes Company A Prime Buyout Target

• Kevin Harlin
• On 5:45 pm EDT, Friday September 11, 2009

Takeover rumors can generate a lot of interest in a stock. Just look at WNS Holdings.

The Indian outsourcer saw its U.S. traded shares climb 20% in one day in August after it confirmed rumors that someone was kicking the tires.

That investor frenzy has cooled a bit since then, and the company hasn't said a word since then.

Still, WNS seems to be a logical acquisition target. It's also a viable stand-alone firm that has room to grow in this current economic climate, analysts say.

Recessions can start out rough for outsourcers. But as they wear on, companies begin to look long and hard at what they do well. Everything else is a candidate to be farmed out to someone else.

"Downturns tend to galvanize these type of discussions. It just takes a while for the decisions to be made because there's so much chaos," said William Blair's Brandon Dobell.

WNS is a BPO, a business process outsourcer. It offers a range of back-office functions, such as accounting, transaction processing and other services. India's information technology outsourcing industry, the ITO sector, is much more mature. But BPOs are gaining traction.

In the mid-1990s, many large firms, such as British Airways and American Express, created in-house BPOs in India to take advantage of its cheap, well-educated work force. In the past decade, third-party independent BPOs began to grow.

Globally, the technology tracking firm Gartner estimates that the BPOs took in about $163 billion in revenue in 2008. The more mature ITO sector took in almost $280 billion. But Gartner projects that BPOs will grow slightly faster over the next five years.

WNS, once known as World Network Services, formed in 1996 as the in-house unit of British Airways.

Private-equity firm Warburg Pincus acquired a just-over 50% controlling stake in May 2002. With new ownership and new management, WNS began buying up other outsourcers. And it branched out from the travel industry into other sectors, such as automotive insurance and health insurance claims management.

The company now has more than 20,000 employees, doing 600 distinct business processes for more than 215 clients. BA remains one of its largest clients, along with firms such as British insurance giant Aviva and online travel agency Travelocity.

Indian BPO firms were expected to export about $12.8 billion in services in the fiscal year that ended March 31, according to WNS and the National Association of Software and Services Companies, the Indian trade group known as NASSCOM. That was up from $10.9 billion in fiscal 2008.

WNS shares spiked early on Aug. 7 when the company confirmed market rumors that it had received "expressions of interest from various interested parties regarding possible change of control transactions." At that time, it said it was evaluating the opportunities.

It's not clear if anyone is still looking. Company officials declined to comment for this story and won't likely bring it up again unless a deal is struck.

New Business

But WNS continues to tout its organic business development and new client wins. During the quarter, it says Aviva agreed to increase the minimum business volume it routes through WNS over the next several years.

And in July, it announced a deal to distribute the accounting and financial controls and risk-management systems of Trintech Group .

WNS's most recent quarter was its fourth straight with double-digit earnings growth, though the rate has slowed. Sales climbed 11%, to $136.7 million. The previous quarters saw 14%, 16% and 30% growth.

But earnings have climbed faster as the company improves efficiencies and realizes the benefits of earlier acquisitions. In the fiscal first quarter that ended June 30, WNS posted 29 cents per ADR, excluding acquisition expenses and other one-time items. That was up 53% from a year ago. It was 3 cents better than analysts surveyed by Thomson Reuters expected.

"We continued to see client additions and organic growth during this past quarter," Neeraj Bhargava, WNS's chief executive, said in a statement. "As we expand our client base and increase the number of top-tier logos on our client roster, we are better positioning the company for long-term success in the BPO market."

The company said bad foreign exchange rates took a bite out of first- quarter numbers. But the exchange rate with the British pound has improved since, giving it a bit of a tailwind.

For fiscal 2010, the company says it expects adjusted earnings per ADR of between $1.14 and $1.18. Consensus estimate is now for $1.20.

After last month's run-up, Robert W. Baird analyst David Koning downgraded WNS. But he wrote in a client note that he still thought the company had long-term potential.

And William Blair's Dobell thinks the BPO side of the outsourcing business is a good, though as of now underappreciated, way to play the current climate. "In general, we think the sector is underowned, and a little bit ignored," he said.

Buzz up!