What is driving M&A and consolidation in the BPO sector?
The $150 billion global business process outsourcing (BPO) industry is likely to see continued mergers and acquisitions (M&A) over the next few years. This will be driven by client demand for cost savings, value-added services and emerging technologies, according to an M&A report from Baird, an employee-owned investment bank.
How has the BPO sector transformed?
A decade ago, BPO was a term that many may have associated with an outsourced call centre, somewhere in India. The sector has come a long way since then and covers most white-collar functions in the value chain.
The BPO sector now encompasses all types of business models, from back office administration to middle office international expansion services. Clients include small and medium sized enterprises (SMEs), not only large multinationals. Most SMEs do not have the resources in-house to manage their back office responsibilities efficiently.
BPO providers are actively seeking means of better serving their clients while reducing the cost of providing services. As the BPO sector continues to evolve, new technology is being introduced at an accelerated rate, partly driven by the parallel transformation underway in the enterprise software market i.e. the shift from on-premise software to the cloud. Advances in technology have facilitated the creation of new business models, often revolutionising the method of service delivery e.g. virtual contact centres where agents work from home or SaaS (Software-as-a-Service).
What is driving M&A and consolidation in the sector?
The BPO sector has seen significant M&A volumes from both corporate acquirers and private equity firms. This is expected to continue given the fragmented nature of the global industry and increasing demand from multinational clients and SMEs for more sophisticated, value-added services across their entire value chain.
Blue-chip clients that already outsource selected functions are continually looking to prune their vendor lists. This has pushed larger BPO providers towards a more diversified service offering, increasing their wallet share of major clients. M&A transactions can be the most effective way of enhancing capabilities to secure the larger, multisite contracts.
Large BPO corporates have been acquiring targets to gain:
- Additional capabilities for a broader service offering and/or one-stop-shop solution
- Exposure to higher growth end market verticals
- Wider geographic coverage to provide a more global service
- Economies of scale to reduce proportion of fixed costs
- New clients to reduce customer concentration
Private equity firms have been attracted to some of the following BPO sector attributes:
- Underlying market growth and secular trend to outsourcing
- Recurring revenue through multiyear client contracts
- High cash conversion with efficient service delivery
- Scalable business models leveraging technology
- Scope for buy-and-build and creation of global platforms
How much do acquirers pay for BPO targets?
Baird’s analysis of 220 M&A transactions shows an average purchase price multiple of 10.7x EBITDA (earnings before interest, tax, depreciation and amortisation), representing strong underlying market growth, increased delivery of BPO via software and attractive financial characteristics of acquisition targets. These companies, operating in one of the six BPO subsectors below, had an average EBITDA margin of 22%:
i) finance & accounting (F&A), fund administration
and fiduciary services
ii) governance, risk and compliance (GRC) services
iii) human resource outsourcing (HRO)
iv) outsourced customer care (OCC)
v) legal process outsourcing (LPO)
vi) insurance related outsourcing
M&A valuation levels vary considerably depending on the subsector, business model and end market growth trends. Technology enabled services are business models that have been substantially transformed or created through software. According to Baird’s analysis, technology enabled targets are able to command a premium valuation.
For a copy of the full Baird report, please go to: Baird Report: Transformation of Business Process Outsourcing.
About the Author
Tahseen Siddique has worked at Baird since 2005. He is a Vice President in Baird’s London office, focusing on M&A Research. Baird’s Global Investment Banking department comprises over 250 professionals across the United States, Europe and Asia. Baird’s Technology & Services team has a long track record in the industry, leveraging its BPO sector expertise and relationships with key corporate entities and financial sponsors around the globe. Since 2010, Baird has advised on over 350 M&A transactions, representing over $90bn in value. Robert W. Baird Limited is authorised and regulated by the Financial Conduct Authority.