Bagging The Citi

Would you buy a business from a bank? Would you buy a business that is solely dependent on that bank? Citibank is close to a sale of its captive BPO, according to Indian press reports. The information asymmetry seems to favor Citibank, since who better knows the bank's prospects -- and the outsourcing potential going forward -- than itself.


If you're a buyer, it makes sense to pay the reported $1.2 billion price if you're confident you can cut costs in the unit faster or deeper than Citi thinks, and if you can use the Citibank BPO as a platform to acquire other bank customers. What better calling card than to say to future customers, "The largest bank in the world outsources to me."

Citigroup's BPO arm, Citigroup Global Services, is likely to find a new owner in a week. Surprisingly, big names like IBM, Infosys, TCS and Blackstone, which were in the race for the BPO firm, have fallen by the wayside, citing expensive valuations. The fight is now between half a dozen suitors comprising Genpact, First Source, WNS, 3i and a couple of private equity investors. Citigroup's BPO arm was recently put on the block and is likely to be valued around $1.2 billion. "The multiples are going to be pretty high here.

That means the buyers require to cough up anything up to $1.2 billion. Third party BPO firms in India are yet to have such deep pockets. Again, sinking large chunks of money upfront on a non-core cause may not be the right option for domestic IT services providers. That clearly leaves the game with big boys like IBM and monied PE guys who are willing to wait for ROI and capable of taking risk,'' says Pari Natarajan, CEO, Zinnov, a Silicon Valley-based offshore research and consulting firm.
For Genpact, the former captive unit of GE, this acquisition would reaffirm its leadership position in the country, while for WNS, acquiring Citigroup Global would give it a presence in the financial services sector. WNS, a legal service and financial services company, has made a few unsuccessful attempts to add financial services to its portfolio and is looking to make a splash by bagging this deal.First Source, on the other hand, is already a specialised player in the banking and insurance sector and the addition of the Citigroup's captive unit will bring them practices that banks usually don't outsource to third party players.

Text CC Engine, Take 2

Economists at the Asian Development Bank nuanced their view on the Philippines.

"The Philippines has to learn how to walk on two legs," ADB economist Jesus Felipe told a briefing to release the bank's Asian Development Outlook 2007, referring to the need for the country to build a strong industrial base to support the economy.

He said while the services sector has been a major driver of economic growth in recent years, the Philippines cannot simply bypass industrialization. He noted that countries such as China and South Korea grew quickly because they increased industry's share of economic output and employment.

"It is highly unlikely that the advent of BPO services signals a paradigm shift that will put the Philippine economy on a higher trajectory," the ADB said.

Most revenue in the Philippine BPO sector comes from call center operations, with only 13% coming from information technology-related work, compared to 70% in India.

Freedom and Democracy

Today's entry is a diversion from the usual topics in this blog, but nonetheless important in the grand scheme of things. Just for the heck of it, those two words are the title of this entry. This is no soliloquy on human rights or paean to liberty, just a simple exercise in freedom of expression. Wired says not all are so fortunate.

It's also a trade-off that Yahoo is not alone in making. To comply with government requirements, Google's China search engine blocks access to sites the government deems objectionable. Microsoft launched its Chinese blogging service in 2005 with filters that prohibited sensitive words such as freedom and democracy in blog titles. And Cisco supplies internet backbone equipment the Chinese government uses in the so-called Great Firewall that shields citizens from websites about Tibet and the Tiananmen Square massacre.

The "CNN Effect" Discount

Here's the term that captures what many frustrated Filipinos feel: the CNN Effect. Bad news about the country is highlighted, good news ignored. For every story about Jollibee beating McDonald's, there are 10 stories about Muslim insurgents. If what columnist William Pesek of Bloomberg has captured is accurate, then overall investor sentiment is still negative. That, for patient contrarians and believers in cycles, is always a bullish sign.

Some things haven't changed. While the Philippine Stock Exchange Index is up more than 7 percent this year, Philippine shares are still trading at price-to-earnings ratios well below the regional average. That's odd when you consider the country is targeting growth of 6.1 percent to 6.7 percent this year, after a 5.4 percent expansion last year.

``It's a turnaround story, and it's not clear the message is getting out,'' Vivian Yuchengco, chair of the Philippine Association of Securities Brokers and Dealers, Inc., said in Cebu last week. ``Maybe it's still the `CNN Effect.'''

When things go awry in the Philippines -- terrorist bombings, businesspeople kidnapped, journalists killed, floods -- the international media arrive in force to report the news. When things are going well in this nation of 91 million people, the world's biggest news organizations seem less interested.

The latter is occurring at this very moment. Even as the Philippines grows at a healthy pace and important progress is made toward narrowing its budget deficit, investors aren't rushing this way. The stock market also remains quite volatile; it lost nearly 8 percent after a slump in Chinese shares triggered a global rout last month.

In some ways, this is a region-wide phenomenon. Bad memories die hard, and that's certainly the case since the 1997-1998 Asian crisis. While investors are rediscovering Asia, the quickness with which many began doubting the region's outlook after China's stock plunge suggests much skepticism remains.

Just remember: don't ignore CNN, or the international media. What you need to watch out for is when CNN starts gushing about how wonderful a country the Philippines is, or when Time magazine puts a Filipino entrepreneur on its cover, instead of Communist rebels.

Eight in O-Eight

You'd have to go back to the post-war years, when the country was busy rebuilding from the devastation of all-out warfare versus the Japanese, to see a Philippine economy expanding at a hefty clip. Southeast Asian neighbors Malaysia, Singapore, Thailand and Vietnam have all put together several years of high-growth, high-output expansions that put them on the investment map. Is it the time of the Philippines, once the most vibrant economy in the region, to join the Asian Tiger club?

Philippine Leader Unveils "Plan, 7, 8, 9" To Spur Growth
March 4, 2007 11:18 a.m. EST

Komfie Manalo - All Headline News Correspondent

Manila, Philippines (AHN) - Philippine President Gloria Macapagal-Arroyo unveiled on Sunday her ambitious "Plan 7, 8, 9" which is expected to spur economic growth for the next three years and her new economic policy direction of "8 by '08," or achieving eight blessings of a strong economy by 2008.

Bull Market Health Check 2007

In July this year will be the 10th Year Anniversary of the Asian Crisis. While historians will debate the exact start date, many peg it to July 2, when Thailand devalued the baht, setting off a wave of speculative attacks that sank currencies throughout East Asia. Economies soon followed.

We all know the cyclical nature of economies and markets. When a crash occurs, it takes years for people to forget the trauma of losses. But after sufficient time, animal spirits return, and the balance between the contending forces of capital preservation versus capital appreciation turns to favor the risk takers. Today, how many remember the countless names of bankrupt companies or shuttered banks that hogged the headlines in the tumultous years of the late 1990s?

Today, we are in the midst of a bull market in the Philippines. Have we built up the excesses that inevitably occur in any expansion, excesses that destabilize the economy and ultimately makes it vulnerable to any shock? This week, the stock market index plunged 7.9 percent in one day, after a wave of selling coursed through markets throughout the world, though it quickly recovered the next day. Is that a sign we've entered ursine territory, or is it merely a pause that refreshes?

The evidence on the ground is that fundamentals are sound. Real, end-user demand in the real estate market, the epicenter of earlier speculative excesses, remains strong. More than 8 million Filipinos live abroad, monthly sending home billions that keeps household spending buoyant. And at this stage, there's still an element of conservativism ruling corporate boardrooms; many of those who got burned in 1998 (when the consequences of the 1997 currency collapses came home to roost) remember, so they are loathe to bet the farm.

The conclusion: very little lactic acid in this bull's legs.