Over the past six months there has been a seismic shift in the customer management services (CMS) business process outsourcing (BPO) vendor landscape, with merger and acquisition (M&A) activity leading to the emergence of two new heavy hitters.
Concentrix’s acquisition of IBM’s CMS business will shift it this year into the top ten global CMS vendors by revenue, but the big news at this time is the acquisition of Stream by Convergys.
The purchase price of $820m represents around 80% of Stream’s annual revenues but an impressive (NelsonHall estimated) 26.7 times its projected 2013 earnings before interest and tax (EBIT). Stream has been improving its margins this year on the back of acquisitive-led revenue growth: Q1-Q3 2013 EBIT margin was 3.1% (up 167 basis points year on year). Convergys has also been improving margins, achieving a significantly higher EBIT margin in Q1-Q3 2013 of 6.5% (up 748 basis points year on year).
The main drivers behind this acquisition are fourfold:
- Firstly, it will expand Convergys’ geographic presence from being heavily weighted towards a U.S. client base (about 85% of revenues). Stream has a large client base in Europe, the Middle East and Africa (EMEA) and Latin America (LATAM): when the acquisition is complete Convergys will derive ~20% of its revenue from these two regions, which currently account for around just 7%. Convergys expanded its delivery footprint in 2013 with the acquisition of Datacom’s contact center operation, which expanded its presence in Malaysia and the Philippines. The Stream acquisition will involve the transfer of about 40,000 employees across 56 contact centers in 22 countries, allowing Convergys to better support its multi-national clients.
- Secondly, it will build Convergys’ capabilities beyond customer care and level-1 technical support. Stream has established level-2 and 3 technical support and revenue optimization capabilities (enhanced in 2013 through the acquisition of LBM)
- Thirdly, it will reduce Convergys dependence on just three clients, all telcos: currently, they account for around 47% of revenues, following the acquisition this client concentration will reduce to about 33%.
- Finally, it will diversify Convergys’ client portfolio in terms of vertical penetration. Currently telecoms accounts for around 62% of Convergys’ revenues with high-tech accounting for around 9%; the acquisition will increase high-tech to about 18% of revenue. This increased high-tech sector presence presents possibilities for higher-margin CMS BPO services.
This is a key milestone in what has been a multi-year turnaround for Convergys. Since its divestment of its Information Management business in 2012; it has been aggressively taking out cost. This acquisition will now help accelerate topline growth across a broader offerings portfolio with enhanced technical support and revenue optimization capability, and more global delivery capabilities that allow for multi-shore delivery, and improved language skills in LATAM and EMEA. This acquisition will result in a company with a well-rounded service line capability and an extensive global footprint with expected revenues approaching that of the current market leader Teleperformance.
Looking back Convergys has had a difficult time with the integration of acquisitions, one such example is the one-and-a-half-year delay in the rebranding of Intervoice following the acquisition in 2008. Lessons will have been learned from this and applied to this much larger game-changing acquisition.
During the initial integration phase Convergys will review duplicate roles between the two organizations. Convergys has shown, through previous acquisitions, it shows little favoritism to its own employees and will shed employees from both companies.
IT, HR sales and executive roles are areas that are most likely to be initially looked at for duplication of roles. Convergys has an extremely lean marketing team at this time therefore it is likely there will not be many duplicates in these roles. Given the size and implications of this acquisition it is likely Convergys will look to retain, and possibly expand, the combined marketing forces of both organizations.