Genpact Files for IPO

Genpact Ltd. (f.k.a. Gecis Global), a global business process outsourcing company, has filed for a $600 million IPO. It plans to trade on the NYSE under ticker symbol G, with Morgan Stanley, Citi and JPMorgan serving as co-lead underwriters. General Atlantic and Oak Hill Capital Partners acquired a 62.63% stake in Gepact from General Electric in 2005, for approximately $500 million (including $375 million in equity). www.genpact.com
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The following was written by Dan Primack in February 2006:

Denis Nayden, managing partner of Oak Hill Capital Partners, refuses to agree that Oak Hill and General Atlantic Partners' purchase of Gecis Global was a landmark transaction. He also won't disagree, instead insisting that such historical characterizations aren't for him to make.

Ok, we'll do it. The deal was a landmark transaction that likely will serve as the gold standard by which future captive BPO carve-outs are measured. It also is Buyouts' Emerging Markets Deals of the Year for 2004.

Gecis (pronounced jek-is) was formed by General Electric Co. in 1997, as an Indian outpost for basic data processing operations. The term “business process outsourcing” (BPO) hadn't yet been coined, but Gecis would soon become the nascent market's most influential trailblazer, providing a comprehensive array of back-office solutions that ranged from complex financial auditing to data mining. Moreover, the organization was viewed as quasi-autonomous, due to GE's requirement that Gecis forge individual relationships with each individual GE business unit (similar to GE's strategy with its captive financial services groups).

By 2003, Gecis had approximately 17,000 employees-including 12,000 in India-generating $400 million in annual revenue. It also had begun to receive takeover inquiries from such firms as General Atlantic Partners, a Greenwich, Conn.-based private equity firm with a heavy emphasis on process outsourcing investments. The basic sales pitch was that both Gecis and GE could benefit from a partial sale.

For Gecis, the deal would enable it to sign more third-party clients, particularly those uncomfortable with sending checks and trade secrets over to GE. It also would free Gecis up from its feeling that GE-related work should always come first, sometimes at the expense of third-party clients. For GE, the deal would represent a major cash windfall, and free it up from the organizational difficulty of managing an India-based business with countless moving parts throughout the world.

“We believed that Gecis had a unique asset because of its management talent and breadth of technical capability,” says Mark Dzialga, a general partner with General Atlantic Partners and current Gecis board member. “What we decided to do was try to convince them to follow a more independent path while keeping their Six Sigma rigor, which is what they ended up doing.”

GE enlisted the help of Citigroup to sell a 60% stake, and reportedly received interest from several groups, including Warburg Pincus, Texas Pacific Group, Convergys Corp. (NYSE: CVG), Hewlett-Packard Co. (NYSE: HPQ) and Wipro Ltd. (NYSE: WIP). The winning bid, however, came from General Atlantic Partners and Oak Hill Capital Partners, which offered $500 million, including approximately $375 million in equity, split evenly between the two firms.

“This was a straight-up 50/50 partnership… with our team and the General Atlantic team working together on every single material item,” says Oak Hill Capital's Nayden, who previously served as chairman and CEO of GE Capital. “We had long discussions with GE as to what their objectives were, and constructed an approach that we thought was both responsive and objective.

The final deal was valued at $500 million, including about $187 million in equity investments from General Atlantic and Oak Hill, respectively. It was announced on Nov. 8, with expectations that it would close within the proceeding six months, but both parties “moved mountains” to close by Dec. 31.

The Envelope Please
General Atlantic Partners and Oak Hill Partners are being awarded the Emerging Markets Deal of the Year prize, in large part, for constructing a deal that included extreme structural complexity, perseverance and reasonable price points (although they did pay slightly more than the going BPO multiple rate). Most important, however, is the role that the Gecis transaction will play in future deals for BPO companies, particularly those headquartered in India.

The BPO space has been consumed by consolidation and shifting ownership over the past year, which was particularly noticeable given 2004's general lack of other financial services sector deals. Almost all of that activity, however, has involved either acquisition capital for private companies (i.e., Francisco Partners investing $50 million into Office Tiger), or large public companies adding to their existing captive efforts (i.e., IBM acquiring GA Partners-backed Daksh eServices Pvt Ltd. for between $150 million and $160 million).

The Gecis transaction, however, is the first time that a major corporation has carved-out a significant portion of its captive BPO effort. Market analysts suggest that other corporations likely will follow suit based on the aforementioned advantages to both the parent and captive BPO companies. In doing so, it is likely that they will look to the Gecis model (save for the proprietary structural components).

“Many of the best technical services businesses have come out of large corporations, whether it be EDS from General Motors or First Data from American Express or Bisys from ADP,” Dzialga says. “I think you'll also see that begin to happen more regularly in the BPO space… and [Gecis] was certainly done in that spirit.”

He adds that such deals likely will come in more of a trickle than in a flood, due to their enormous transactional complexity.