ECONOMIC TIMES MUMBAI: India's largest IT service provider Tata Consultancy Services (TCS) has concluded a deal to acquire

Citigroup Global Services Ltd (CGSL), Citigroup's captive business process outsourcing (BPO) centre in India, for $505 million in an all-cash deal. The deal includes a promise of a record $2.5 billion in committed revenue to TCS over a period of nine-and-half years, the two companies announced on Wednesday. The deal comes nearly a year after the captive was put on the block at an asking rate of $800 million. But both Citigroup and the economic environment in which it operates have undergone significant changes since then. The acquisition is for a 96.3% stake. Some shares are held by outside investors who had not tendered when CGSL was delisted in 2004. The acquisition gives TCS a committed business pipeline in an uncertain environment and about 12,472 professionals trained in core banking skills, which will be its biggest asset. It will also catapult it to number two position in the BPO rankingsmaking TCS the largest third-party BPO provider from the country after Genpact. Citigroup will become one of its top five clients. "This acquisition gives us a unique advantage because these core banking operations are today only with captives. It creates a new market for third party BPOs in providing core banking operations targeted at large global financial service institutions. It will also give us capability to serve other TCS clients and create platform-based services for small and medium enterprises," TCS CEO and MD S Ramadorai said. For Citigroup, the deal marks the successful sale of one of its oldest assets in the country and the opportunity to bring in greater cost efficiencies. "This is core operations to Citi, yet not core. It frees up capital for more productive opportunities," said Citigroup India CEO Sanjay Nayar who is also the area head of Bangladesh, Nepal & Sri Lanka. ET had reported that the transaction would be announced this week in its edition dated October 4. Initial market perception about the deal was negative, with most analysts saying that TCS had over-paid for the deal valued at approximately two times its revenues. CGSL expects to close calendar year 2008 with $ 280 million in revenues, according to TCS officials. However, the stock recovered some of its initial losses to close 5% lower at Rs 546.60 on the BSE on Wednesday. "The deal values CGSL at seven times the EV/EBIDTA based on its FY09 numbers. While this may seem higher than the current multiple third party BPO players such as Genpact are trading at, acquisitions are usually at a premium to the

market price. I don't think TCS has paid more," said an analyst with a foreign brokerage. For Citi, the deal is a comedown from $800 million it was asking last year. But Mr Nayar was pragmatic when asked he if felt it was undervalued. "From our point of view it is not. You can't get too tactical about these things. We need to look ahead and see what is best for our customers. The platform is what matters," he said. An industry observer said the Citi-TCS deal meant the market was getting more realistic. However, Citi has earned more than the double the valuation it paid when CGSL was de-listed from the stock exchanges here in 2004. Citi had accepted an exit price of Rs 975 per share at that time, valuing CGSL at around Rs 1,200 crore. At today's dollar valuation, Citi has made Rs 2,424 crore on the sale. TCS COO N Chandrasekaran said the captive unit would be retained as a separate subsidiary and there would be no immediate management changes. "We have services and solutions for BFSI. The acquisition gives us capability for operations," he added. CGSL also has a diversified revenue mix with about 43% coming from North America, 26% from Europe, Mideast & Africa, 26% from India and 5% from rest of Asia-Pacific. Some of the concerns around the acquisition seem to be not whether TCS paid more but if it should have done the deal at all in the current environment. "The question is about the sustainability of Citi and if TCS should have done this deal at all. But then, just like the government will not let a major bank go down here, the US government may not let Citi go down there. They could have followed a deferred pricing model based on performance," said an investment banker.

Business standard

Indias largest IT services provider Tata Consultancy Services (TCS) beat business process outsourcing (BPO) majors like Genpact and IBM to acquire the backoffice operations of Citigroup for $505 million (over Rs 2,400 crore). After the acquisition of Citigroup Global Services Ltd (CGSL), TCS will be the second-largest BPO player globally, after IBM. Along with the sale, Citi also signed an agreement with TCS to provide process outsourcing services worth $2.5 billion (around Rs 12,000 crore) over the next nine-and-and-a-half years. Citi will be the first global bank to have outsourced its entire banking processes, including core banking operations, to a third party. While TCS defended the valuations, particularly during the financial turmoil, analysts termed the acquisition expensive. The valuation is certainly high. The $2.5-billion deal would translate into over Rs 1,250 crore of annualised revenues. With CGSL listing its operating profit at 23 per cent, the payback time may be around 11 years for the money invested, said an analyst at a leading brokerage. Even the companys argument that the acquisition of CGSL gives an opportunity to cross-sell did not convince analysts. That will take time and further investment from the company. So, the immediate impact is negligible, said another analyst. In terms of the acquisition valuations, TCS said that the Citi BPO has had a consistent revenue growth rate of 27 per cent and earnings before interest and taxes (EBIT) margins are of the order of 20 per cent. The BPO has 12,472 employees, who will now join TCS along with the existing management team. The BPO will operate as an independent entity. We are confident that after the integration the EBITA margins of the BPO will be in the range of TCS, said the IT companys COO and Executive director N Chandrasekaran. Sanjay Nayar, CEO (South Asia) for Ctitbank, said: We have been at this for quite some time. We have been able to consolidate all our businesses. We want to focus on our core operations. We will use the freed up capital for productive

businesses. This deal also means that TCS would be the single largest vendor for Citigroup. This acquisition is very strategic for TCS. This will also propel the TCS BPO business to a completely different level. With this Citigroup becomes our top client. This is the first time that core banking operations, which till date are in the realms of banking firms, will be outsourced. That allows us to take these services to other clients. More so, to the small- and medium-sized banks, said TCS CEO and Managing Director S Ramadorai. Chandrasekaran said that the tools created by CGSL would also be handy. This, along with TCS financial products, will allow us to take our BPO platform strategy further. The revenues from the deal will accrue from the fourth quarter of 2008-09, or may be slightly delayed, he added PRE

oo SS RELEASE T a t a C o n s u l t a n c y S e r v i c e s T o A c q u i r e C i t i g r o u p G l o b a l S e r v i c e s f o r $ 5 0 5 m i l l i o n Transaction Increases Efficiencies for both Companies and DeliversService Improvements for Citi Clients;$2.5 Billion, 9.5 Year Contract Underscores Strong Long-Standing Relationship Mumbai, India & New York, USA, 8 October 2008: Tata Consultancy Services (TCS) (BSE: TCS.BO,NSE: TCS.NS), a leading IT services, business solutions and outsourcing firm, and Citigroup Inc. (Citi)(NYSE: C), a leading global financial services company, today announced that they have reached anagreement for TCS to acquire all of Citis interest in Citigroup Global Services Limited (CGSL), the India-based captive business processing outsourcing (BPO) arm of Citi for all cash consideration of approximately$505 million, subject to closing adjustments. In addition to the sale, Citi has signed an agreement for

TCSto provide, through CGSL, process outsourcing services to Citi and its affiliates in an aggregate amount of US$2.5 billion over a period of 9.5 years. The agreement builds upon the existing relationship between Citiand TCS whereby TCS provides application development, infrastructure support, help desk and otherprocess outsourcing services to Citi.The acquisition broadens TCSs portfolio of end-to-end IT and BPO services in the global Banking andFinancial Services (BFS) sector. TCSs enhanced scale and expertise will provide service improvements toCiti and Citis customers.CGSL is one of the largest providers of business processing outsourcing services within the Banking andFinancial Services sector, providing end-to-end process management across the BFS spectrum and a broadarray of services to Citis consumer, corporate and global wealth management businesses world wide. CGSLhas more than 12,000 employees located in India and expects to generate revenues of approximately $278million in 2008. S. Ramadorai, CEO and MD, TCS said: This is a landmark acquisition for TCS, helping us not onlyacquire new capabilities in the banking domain but also underscoring the importance of our longterm,sustainable relationships with our large customers, including Citi. He added: This transaction willcomplement our domain expertise and bring new capabilities to TCS that will help drive growth goingforward. Don Callahan, Chief Administrative Officer, Citi said : This is a great transaction that benefits allparties Citi, our customers, our employees and TCS. Our customers require access to increasinglycomplex processing solutions and this relationship will achieve a best in class technology model thatcapitalizes on both CGSLs expertise in financial services and TCSs expertise in process optimization. TCSwill offer CGSL stronger growth potential and superior continued services to Citi clients around the world.This transaction is expected to help reduce operating expenses related to business processing and willallow us to focus on our core financial services competencies.