BPO Slowdown

The red-hot BPO industry is declaring that 2009 will be a slower growth year after the torrid expansion in the past few years. The blame is put not just on the global recession but the rising protectionist sentiment in the U.S., the Philippines' largest market.

Half-full-glass analysts will tell you this is the welcome pause that refreshes. No industry can sustain big jumps in production without bumping up against constraints. And for the longest time, the constraint has not been external demand. The problem has been mostly internal: the country's ability to provide labor. Or rather, we should say labor is not a problem, as any recruiting agency will tell you; it's the limited supply of labor with the right skills that has limited growth.

Now that external demand is slackening, the industry can turn more attention to those internal problems, those what managers will call "variables we can control." There's nothing we can do to influence the U.S. recession; there's everything we can do to make sure Philippine schools are turning out qualified graduates, training seminars are truly training employees, and programs to upgrade technical skills are implemented.

CICT Commissioner Monchito Ibrahim said that despite the setback, the industry is still expecting 30-percent growth this year to some $8 billion, and plans to increase the number of new jobs by a fifth or 75,000 jobs. He said the BPO industry ended 2008 with 372,000 jobs.

The revenue projection was taken from the Business Processing Association of the Philippines (Bpap) Roadmap 2010, a three-year plan that aims to double the country’s worldwide market share and achieve $13 billion in revenues, as well as provide direct employment to 1 million people.

Ibrahim said the slowdown was due to a number of factors, including the global financial crisis which has hurt the US, the country’s only major partner in the BPO industry. The lack of workers with necessary skills was also a key constraint.

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.

Truth and Xinhua

Every so often, the show falters. An assistant presses the wrong button, and we get a glimpse of the reality behind the curtain.

BEIJING, Sept. 25 (UPI) -- China's state-run news agency made a gaffe Thursday when it published an "in space" conversation among the Chinese astronauts even before they left Earth.

Xinhua news agency posted the story on its Web site well before the launch of the Shenzhou VII space craft, The Times of London reported.

The story, which was headlined "Sleepless Night on the Pacific, Sidelights on the Observation and Control of the 30th Lap of the Shenzhou 7 Spaceship," was removed from the Xinhua Web site and was described as a technical error.

Retiring the PSPT Ticker

So People Support, after seeing its stock drop to $8 in July, agreed to be bought by Aegis BPO, for $12.25 a share. The $250 million transaction is supposed to close this October, when the Philippine-based company becomes another part of India's sprawling Essar Group, which is into such businesses as steel, oil, and mobile phones.

Whatever happened to creating "shareholder value" when PSPT rejected the $15 per share offer of IPVG?

ACt 2: PeopleSupport

The dance has entered its next phase. After PeopleSupport (PSPT) rejected a bid by IPVG for $15 a share, it is now on the receiving end of a revised $17 all-cash counter offer. PSPT can no longer treat this bid in the same way it treated the first -- a brush off with a curt letter.

A copy of the IPVG (IP) letter to Mr. Rosenzweig available here.

It is unfortunate that the Board of Directors of the Company has not engaged us in serious discussions despite repeated attempts to have confidential dialogues regarding our proposal. We are also disappointed that the directors do not see the merit of our proposal despite the fact that it is directly beneficial to the shareholders of the Company.

However, upon careful deliberation of the recent initiatives, revised earnings guidance, and new strategic planning the Company announced in its statement of December 12, 2007, we are prepared to make a revised proposal to acquire the Company at a purchase price of $17.00/share. This new proposal represents approximately 34.81% premium to the Company’s 60-day weighted average closing price of $12.61/share including the close of market yesterday, January 10, 2008.

As the major shareholder of PSPT, much rests on how Chairman & CEO Lance Rosenzweig wants to finish this. If he is truly ready to give up PSPT, then he merely needs to extract as much cash as possible, and the best way to maximize the final price is to get another dance partner.

If he wants to hang on, he'll need to bring lots more ammunition vs IPVG, rather than just PowerPoints and press releases about how rosy the picture is for PSPT remaining an independent company. Many PSPT shareholders with lawyers on speed dial won't hesitate to sue if he gives up this opportunity to cash out. No need to bet what Galleon (24% owners of PSPT) are advising Lance to do.

It's been more than a month since IPVG made its first unsolicited offer, ample time for any other interested party to emerge from the woodworks. Our call: we are coming close to a final price.

Medical Fallout

There's always a downside. Here's one view of the human cost not carried on the balance sheets of India's mighty BPO industry.

There's mounting medical evidence that if people are forced to stay up night after night their biorhythms are disrupted and they are liable to pay a cost in terms of both physical and psychological health. Elevated pay isn't sufficient compensation for a heart attack brought on at 30. We can't drive young people into the BPO industry by painting a superficially alluring image of its rewards, then shrug and turn away when they face serious health issues. Experts are concerned that the brewing crisis could undermine India's economic boom, which has been driven to a large extent by the services sector. A study by the Indian Council for Research on International Economic Relations estimated that heart diseases, strokes and diabetes cost India $9 billion in lost productivity in 2005. They forecast this figure to grow to a whopping $200 billion in the next decade, with the IT sector predicted to be among the hardest-hit.

I won't be a pied piper singing the praises of the capitalism system, but the long-term view argues for us to have faith. When an industry's health woes become a big enough problem, the solutions will come. If entrepreneurs have set up bars catering to the graveyard shift workers -- blackened windows to simulate night even though it's noontime -- why can't a whole city be transformed? Interiors of buildings are now made to follow the daylight hours of countries halfway around the globe; why can't the district where the building belongs also follow those same hours? If the human body can't evolve to cope with altered circadian rhythms, why the environment will have to be reshaped. If we all live on borrowed time, why can't we advance that clock +12 hours?

Getting to 20% With Ayala

As eTelecare's (ETEL) shares tumbled, the Philippines' oldest conglomerate and owner of the country's biggest bank and biggest real-estate company made good on its intentions to boost its stake.

According to information reported by Ayala Corp. to US regulators, the conglomerate now owns 6.39 million ETEL shares, or 22.22% of the BPO. Ayala first bought into ETEL in June 2006, when press reports said it paid about 800 million pesos for 11% of the company, using LiveIt Solutions Inc. as its investment vehicle.

The shares may have just been transferred from one Ayala pocket to another. Check out Ayala Corp.'s US SEC filing. There are more layers in this than a wedding cake: Ayala wholly owns Azalea International Venture Partners Ltd., which wholly owns LiveIt Investments Ltd., which in turn wholly owns Newbridge International Investment Ltd. Newbridge, after all, was an original investor in eTelecare. In an early November filing, Ayala said additional investments in eTelecare were for "investment purposes."

Ayala Corporation currently intends, depending on market and other conditions, and in its sole discretion, to consider acquiring additional Shares of the Issuer and thereby increase its total beneficial ownership interest to 20% of total outstanding Shares on a fully diluted basis (or approximately 22% of the Issuer’s total current outstanding Shares on an undiluted basis), in order, among other things, to allow Ayala Corporation to account for its Shares under the equity method of accounting.

Even then, it's usually a good sign when a major shareholder puts it on record that it is the shareholder on record, instead of burying it in an offshore vehicle domiciled in some balmy tax haven. After all, Ayala will not want to get above the 20% threshold if it's expecting poor performance from ETEL going forward.

People Say The Price Isn't Right

On the same day that it rejected a cash bid from IPVG Corp. to buy the company for $15 a share, PeopleSupport came out with a bullish forecast, saying it would generate more revenue and earnings than analysts had expected.

LOS ANGELES (AP) -- PeopleSupport Inc., an offshore business process outsourcing provider, said Wednesday it expects its fiscal 2008 profit to beat Wall Street's expectations. The company forecast income between 65 cents and 81 cents per share in 2008, with revenue of $180 million to $190 million. Analysts polled by Thomson Financial predict earnings of 57 cents per share on revenue of $170.8 million.

Not all the pieces of the unfolding drama are visible on the board. The unsolicited IPVG bid, in the parlance of bankers, put PSPT "into play." Now the usual drill in this scenario is to reject the first buyout offer and holdout for more; from the shadows other bidders will emerge. You can be sure that teams from other BPOs are now crunching numbers with their favorite investment bankers to see if they should battle for PSPT and top IPVG's $15/share offer.

In the PSPT's press release, PSPT quoted its independent director Frank Perna as saying, “We have carefully reviewed the proposal and believe it to be inadequate and not to merit further attention. We have also reviewed the strategic plans in place for the Company and believe that the implementation of those plans is the best way to enhance shareholder value at this time."

The translation: we have a price at which we will sell.

eTelecare Loses It

How would you like to be the relationship manager at eTelecare Global Solutions who just lost a major account? The Manila-based company, which debuted on the Nasdaq just a few months ago, saw its shares drop below its IPO price after it disclosed that the "significant client" cancelled a program that brought in $15.6 million in revenue during the first half of 2007.

Customer churn is part and parcel of the BPO business, but when you are a newbie company touting the superiority of your outsourcing practices, losing a major customer deals a body blow to your reputation.

eTelecare expects 2007 annual revenues to be in the range of $240 million to $250 million, with net income of $19.2 million to $21.5 million, or $0.63 to $0.71 per diluted ADS. This compares to the previous guidance for 2007 annual revenues in the range of $250 million to $260 million, with net income of $22 million to $25 million, or $0.72 to $0.82 per diluted ADS.

Which customer did the BPO lose? From ETEL's prospectus:

As of December 31, 2006, we had 21 active clients for which we had performed 51 different programs since January 2006. We have a particular expertise in communications, technology and financial services. We also serve clients in the travel and hospitality, media and retail industries. Our largest clients in terms of revenue are American Express, AOL, Cingular, Dell, Intuit, Sprint and Vonage.

Buy Now

Short items from Indian press reports that Infosys will buy the BPO operations of Philips Electronics NV. When it closes, it will be another item in the on-going rejigging of the BPO industry. Captive operations become part of independents. And operations that managers once thought vital or contained too many secrets to let outsiders peek at them now become outsource-able. What was it I heard at a cocktail party recently? In rapidly-changing businesses, there are no secrets. Just speed of execution.

India's second-biggest software-maker will be taking over all the costs of this acquisition, similar to the manner in which rival Tata Consultancy Services bought the operations of UK's Pearl Group insurers, the website reported. The acquisition will add to Infosys current BPO unit, which has close to 11,000 employees, providing the company with round-the-clock processing, the report
added.

Here's Times of India's take:

Infosys Technologies is said to be close to acquiring the finance and accounting BPO arm of Philips Global. The Philips arm has an employee strength of 1,500 globally, including a 500 strong force in Chennai. The other facilities are in Warsaw and Bangkok. The BPO arm is said to have assured revenues of $200 million spread over five years.