Changing Meralco's Leadership

It's one of the biggest business stories of the year. Family of the nation's largest power distributor gives up controlling stake to nation's largest telecommunications company. Tectonic shifts in the Philippines' corporate firmament of this magnitude happen once in a generation.

What does the main daily reduce it to? A family squabble.

Despite statements that all is well and that the family is still as tight-knit as ever, the Lopez family saga over the sale of most of the family’s shares in power distributor Manila Electric Co. (Meralco) to the Philippine Long Distance Telephone Co. (PLDT) group continues.

For the first time, Mike Lopez, son of Meralco chairman and chief executive Manuel Lopez, lashed back at people who say his father had known about the decision to sell down the family’s Meralco stake from day one.

“We were not privy at all to the negotiations from day one. Saying that we were, is a grave injustice to my dad’s name,” he told the Philippine Daily Inquirer in a telephone interview Wednesday.

ePLDT's SPI Making Deals in India

Here's another little tidbit on the globalization front. SPI, a Philippine BPO owned by the nation's largest telecommunications company, is looking to buy Indian companies as it expands its presence in the subcontinent. In the meantime, Indian companies are scouting in SPI's backyard for suitable acquisition candidates in the race to bulk up and develop a full service line. Now which of the many BPO companies around today will become the household name in 2020?

Global healthcare, legal and publishing business process outsourcing company SPi is looking out for suitable acquisitions in India. Ernest L Cu, president and chief executive officer of the Philippines-headquartered Spi, said the company has allocated $50 million for mergers and acquisitions. The company is in talks with investment bankers and is considering several proposals, Cu said while addressing the media here on Wednesday. According to Cu, SPi plans to move its medical billing work to India from the US. He said the setting up of new delivery centre in Chennai and the cost differential between the US and India has made the company favour shifting of medical billing business to Chennai in eight months. The business has the potential to create 150 new jobs. SPi Technologies inaugurated its new 17,000 sq ft facility in the city on Wednesday. The 1,100-seat facility will house the company's publishing and healthcare business operations. The new centre will be the company's fourth in the country after Pondicherry, Coimbatore and New Delhi. Cu said the Indian company would increase its headcount by 700 by the end of this year. In 2003, SPi through its wholly owned Indian subsidiary SPi Technologies Private Ltd
acquired the Pondicherry-based Kolam Information Services Private Ltd, a book
publishing BPO. Two years later, it acquired the medical transcriptions business
of KG Information Services and Technologies Private Ltd in Coimbatore.

Boom

The first quarter GDP figures for the Philippine economy came in last week. And as the Philippines does every so often, the figures surprised everyone: GDP 6.9 percent higher in the first quarter versus the same period a year before. It was the fastest growth in 17 years, and no professional economist or business forecaster saw it coming. This is a country that some refer to as the "Sick Man of Asia"; most people you talk to believe in keeping a portion of their savings in dollars "in case there's a devaluation." Expectations are still low; just like any brand it will take awhile for "Philippines" to become synonymous with rapid growth. Well, with an economic engine revved up by BPOs expanding faster than you can say "English language proficiency," expect several more quarters of upside.

While the economists may have to ratchet up their forecasts, anyone on the ground can tell you that deals are getting done. The stock market is ahead of things, moving to record highs. As we've argued in this blog, this is a multi-year economic boom. Banks are shaking off their trepidation at lending. Capital is flowing into the economy. It's nowhere near a China frenzy: we are simply at the end of the beginning of a powerful expansion wave.

Infosys 300 Seats

Here's Infosys BPO on the record saying their Manila facility will be up and running within six months.

Driven by a strong customer demand, Infosys BPO is planning to scale up its presence in Manila by setting up its own delivery centre soon. Infosys BPO currently has a tie-up with Ventus, the call centre company of Philippine Long Distance Telephone Co's (PLDT) unit ePLDT Inc.

"We are looking at setting up a 300-seat facility in Manila over the next two quarters," said Mr Amitabh Chaudhry, CEO and Managing Director, Infosys BPO Ltd. "The partnership with Ventus has worked well for us and we plan to continue with it," Mr Chaudhry said.

Infosys BPO plans to use the Manila facility to serve the US clients in both voice and non-voice processes. Mr Chaudhry said clients are more comfortable with getting serviced from the Philippines because of the availability of better skill sets, especially in areas of F&A (finance and accounting), the familiarity with the US GAAP standards and in customer relationship management.

Moreover, the Philippines has emerged as an ideal offshore destination for BPO firms because of the English fluency and familiarity with American culture. The Manila facility would also double up as a business continuity centre for Infosys BPO, Mr Chaudhry said

Take note of that other phrase peculiar to the BPO industry: "business continuity." The majors are all building in redundancy and reducing the risk that a single event can undermine their ability to do business. In a post 9-11 world (and nuclear-armed Pakistan and India), it's essential to doing business.

The Shot Heard in Illinois

How much ammunition is left in the PLDT arsenal? They certainly have not been keeping their powder dry.

SPI, the wholly owned subsidiary of ePLDT Inc., which in turn is the wholly owned subsidiary of PLDT, said today it is spending at least US$44 million to buy Springfield Service Corp., a BPO assisting doctors in sending out bills and getting paid. Illinois-based Springfield adds 383 employees to SPI's headcount. Valuation is at 1.5 times forecasted revenue of $30 million in the year ahead. Last year, SPI spent $35 million for medical transcription company CyMed Inc. of Virginia, which had 2005 revenue of $19.6 million.

"The inclusion of Springfield's service offerings in our healthcare portfolio allows us to further strengthen our relationships with the more than 400 hospitals, multi specialty clinics and physician practices that we currently serve," said SPI CEO & President Ernest Cu.

You'll have to hand it to the SPI folks. They sold themselves for $135 million, and in less than a year have convinced their new master to open the checkbook for $79 million of additional spending. (No disclosure on the contingent liabilities building up on ePLDT's and SPI's balance sheets with respect to future payments. To eager bankers, take a number if you want to lend to the subsidiary of the subsidiary of the subsidiary. . . just make sure the loan guarantee you ask the parent is bulletproof.)

As the saying goes, "the time to strike is when the iron is hot," or as my Uncle Chot quipped: the purse strings are looser when the honeymoon is not yet over. Regardless of the envy competitors might feel of SPI's ability to use the balance sheet of mother PLDT (the Philippines' most valuable company with a market cap of $9.4 billion) to borrow and pay for its acquisitions, the BPO playing field is rapidly changing.

Buy, Buy, Buy

It may someday be common for a Filipino to have an Indian boss, as common as Indians reporting to American bosses. And as the BPO industry evolves in both countries, it will become common too for Americans to be reporting to Filipino or Indian bosses. In the race to grow, the homegrown champions of each country will be buying what they can't develop on their own, causing office workers in the India, the Philippines, and the U.S. will experience first hand what the phrase "flat world" means.

EXL is busy scouting for companies it can scoop up to bulk up, says India's Business Standard. Some are already on the acquisition trail: in 2006 ePLDT's SPI bought an American medical transcription company, while LiveIt, a unit of PLDT's cross-town rival Ayala Corp., bought Affinity Express of Chicago for $28 million.

EXL Service Holdings, an IT services provider, is on the lookout to acquire companies in Eastern Europe, the Philippines, South Africa and China. The company is looking to mitigate its risks by diversifying into delivery and support centres in other cheaper destinations and also offer capabilities to service clients from markets other than the US.

The acquisitions, in each of the geographies, could be in the range of $25-50 million in revenue and will add capabilities in the verticals such as research and analytics where EXL is already fast gaining ground. “We have almost $85 million in cash with the company and the ability to use stock options also lend us flexibility to do at least two of the acquisitions this financial year,” said Rohit Kapoor, president and chief financial officer of EXL.

For adding the voice-based services and clients, the company will look to the Philippines and in South Africa, EXL is on the look out for adding diverse business verticals to its BPO business. The company is also eyeing to service the domestic market. “Although the size of domestic BPO-ITeS market is nothing to boast about, but our international clients who have business in India have been talking to us to set up centres that will service the domestic markets.”

ETEL Makes the Call

eTelecare Global had a decent debut on the U.S. stock market, climbing from its IPO price .

Shares of eTelecare Global Solutions Inc. (Ticker symbol: ETEL), a Philippines-based outsourcing firm, rose as much as 16 percent in their U.S. stock market debut on Wednesday, bolstered by prospects for continued growth for the offshore business process outsourcing industry.

Despite a declining broader market dampened by tensions with Iran and concern about the U.S. housing market, the company's American depositary shares opened up 2 percent at $13.75 before climbing to $15.75 in late-morning trading on the Nasdaq. Shares later returned some of the early gains, slipping to $14.80.

"This is a major business with big clients," said Francis Gaskins, president of IPO Desktop, an independent research firm based in Los Angeles. "Two other companies already opened the door for IPOs in the outsourcing business and this one is trading at a discount compared to its competitors."

While less spectacular than the 2006 IPOs of Indian competitors, it was good given the state of the U.S. markets, as one observer noted.

The company on Wednesday priced 5.5 million American depositary shares at $13.50 a share, raising $72 million with underwriters Morgan Stanley, Deutsche Bank Securities and Robert W. Baird.

The IPO opened at $13.75 and rose about 8% to end its first day of trades at $14.55.
"eTelcare is trading very nicely after a small initial premium," said Scott Sweet of IPO Boutique. "This is especially notable given the overall weakness in all the markets, and the geopolitical events that are contributing some anxiety to the traders."

Several BPOs have grown by acquiring other shops (i.e. ePLDT's SPI) in a bid to bulk up fast. Now that it has a new form of currency to exchange for other companies, what will ETEL be buying?

A Phone for Every Filipino

Remember the early 1990s, when the country had less than 2 million telephone lines, and the then monopoly PLDT had to be kicked dragging and screaming into a competitive landscape?

Opening up the telecommunications industry was the best thing that could have happened to PLDT, and to the entire country. Today, thanks to explosive growth in cellular phone use, PLDT, with a market cap of 430 billion pesos, is the most valuable company in the Philippines. Today, businesses that could not operate are now thriving, thanks to communications made so much easier with one out of every two Filipinos owning a phone.

Think what would have happened if the industry was not liberalized. Think how much more expensive would bandwidth be today if competition was not introduced. Think how many other industries in the Philippines are ripe for competition.

We are reaping the benefits of decisions made more than a decade ago. The forecast is for 45 million cellular phone subscribers this year. Considering that half the population are minors, it may well be that we will reach saturation point this year.

The National Telecommunications Commission (NTC) said Sunday the May elections and the rosy Philippine economic outlook this year will help boost mobile phone subscriber growth.

Edgardo Cabarios, director NTC's Common Carriers Authorization Division said, the regulator projected an additional five million subscribers for a total of 45 million this year. He, however, said that the growth might not be faster than last year, which grew about 15 percent.

Data from Smart Communications Inc. and Globe Telecom showed that the number of subscribers reached about 40 million last year from 34.78 million in 2005. Smart and Pilipino Telephone Corp has a total of 24.2 million subscribers, while Globe and Touch Mobile subscribers stood at 15.7 million.

Note that the article doesn't even mention Sun Cellular, which has more than a million subscribers. It just shows that the telecommunications industry is a duopoly, but let's leave that to another discussion.

The telecom reforms did not just set the groundwork for the cellular phone industry. The bright star of the Philippine economy, the BPO industry, is dependent on good telecommunications. Here's the take of AT Kearney in its survey of 40 countries for off-shoring.

Nevertheless, the Philippines remains one of the lowest wage locations in the Index and now offers the lowest telecom costs of any country in the Index.

The Other Ayala

When a company goes public, the amount of disclosure available to outsiders is amazing. And what becomes plain to see for all is the wealth created, the culmination of many years of hard work.

Recall that eTelecare's planned offering would price each share at about $6.25 to $7.25. Even at the low end of the range, there will be some happy campers, judging by the list of shareholders in the prospectus.

While Derek Holley, a founder of the firm, will have good stories to tell his Kellogg MBA classmates, what with his 7.5 million shares, for the Pinoy community the interesting listing is that of Alfredo Ayala, president of the Business Processing Association of the Philippines.

Alfredo Ayala (9) 5,756,852

(9) Includes 4,899,348 shares held by Newbridge International Investment Ltd. Mr. Ayala disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. Also includes 857,500 shares subject to options that are immediately exercisable.

Silicon Valley continues to thrive as newly minted technology millionaires plow money into start ups, driving even more innovation and entrepreneurship. Will the BPO wealth now being created find its way back into the Philippines to build even more businesses?

ETEL: Playing the BPO Boom

eTelecare Global Solutions Inc., one of the largest BPOs operating in the Philippines, just revealed plans to sell shares in the U.S. via an American Depositary Share program. The BPO will sell 5.5 million American depositary shares, each representing two of its actual shares, at US$12.50-$14.50 per ADS. Morgan Stanley and Deutsche Bank are handling the sale, in effect its IPO, which would be followed by a listing on the Philippine Stock Exchange.

After the ADS sale, the company will have 55.366 million shares outstanding. At the top end of the price range, this baby would have a market value of $401m, or about 2x revenue or 33x last year's net.

Want to find out more about a company with close to 10,000 employees and a revenue base that has doubled in only two years? Want to find out at the microeconomic level what kind of companies are driving the Philippine macroeconomy? Prospectus here.

We are a leading provider of business process outsourcing, or BPO, services focusing on the complex, voice-based segment of customer care services delivered from both onshore and offshore locations. We provide a range of services including technical support, financial advisory services, warranty support, customer service, sales, customer retention and marketing surveys and research.

Our services are delivered from four delivery centers in the Philippines and seven delivery centers in the United States, with approximately 6,800 employees in the Philippines and approximately 3,000 employees in the United States as of December 31, 2006.

Our largest clients in terms of revenue for the year ended December 31, 2006 were American Express Company, AOL LLC, Cingular Wireless LLC, Dell Inc., Intuit Inc., Sprint Nextel Corporation and Vonage Holdings Corp., together representing approximately 91% of our revenue. For the year ended December 31, 2006, our revenue was $195.1 million, our income from operations as a percentage of our revenue, which we refer to as our operating margin, was 9.9% and our net income was $12.2 million. For the year ended December 31, 2005,
our revenue was $152.2 million, our operating margin was 2.7% and our net loss was $1.8 million.

Smart Infinity and Smart Security

In this capital city of 12 million people, if you hang around long enough, it's guaranteed that Corporate Philippines will create a funny situation for you.

I had a meeting at the Ayala Ave. headquarters of Smart, the mobile phone company that's driving the profitability of the most profitable entity in the country. Smart's security procedure, a relic of some bygone era, is to badge you. They require you to log in with your name, address, purpose, time of visit, and signature, and present an ID in exchange for a visitor's tag. It's not only Smart that does this. Almost every other building in Makati badges, even in this age of cheap surveillance cameras. All this on the assumption that anyone intent on committing a crime at your business would fill up the sign-in sheet honestly and present a legitimate ID.

I had with me my Smart Infinity card. So for ID, I presented this blue card, embossed with my name, which signifies I am a valued client. In the parlance of the industry, I am a "high ARPU"subscriber, spending more than US$100 a month on my phone bill. The card supposedly entitles me to VIP treatment and to "experience service at its finest."

What did the person manning the security counter do?

She rejected my card.