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.

A Low Attrition Rate for BPO

Pop quiz. Genpact, which had US$613 million of revenue in 2006, had what attrition rate that year?

A. 15%
B. 24%
C. 32%
D. 43%
E. 55%
F. 61%

Before you answer, let's hear from Genpact, which is planning to sell shares to the public for the first time. Genpact's DNA comes from General Electric, the company that gave us Jack Welch and the mantra to either be No. 1 or No. 2 industry or get out, i.e. it was a "captive" serving the needs of GE Capital before becoming an independent company. Excerpts from its draft prospectus filed with U.S. regulators:

We have an experienced and cohesive leadership team and a culture that emphasizes teamwork, constant improvement of our processes and, most importantly, dedication to the client. Many members of our leadership team developed their management skills working within GE and many of them were involved in the founding of our business. As of March 31, 2007, we have more than 28,000 employees including over 5,500 Six Sigma trained green-belts, 300 Six Sigma trained black-belts and 60 Six Sigma trained master black-belts, as well as more than 4,500 Lean trained employees.

A key determinant of our success, especially as we continue to increase the scale of our business, is our ability to attract, train and retain employees in highly competitive labor markets. We manage this challenge through innovative human resources practices. These include broadening the employee pool by opening Delivery Centers in diverse locations, using creative recruiting techniques to attract the best talent, emphasizing ongoing training, instilling a vibrant and distinctive culture and providing well-defined long term career paths. We monitor and manage our attrition rate very closely, and believe our attrition rate is one of the lowest in the industry.

Ready?

The answer is C.

More info from Genpact:

Our attrition rate for all employees who have been employed by us for one day or more was 32% in 2006. A number of our competitors calculate employee attrition rates for their Indian employees who have been employed for six months or more. On this basis our Indian employee attrition rate for 2006 was approximately 21%, which we believe is relatively low for our industry based on statistics published by third parties such as NASSCOM. We attribute this low attrition rate to a number of factors including our effective recruiting measures, our extensive training and our strong culture.

More Choices for Punters

Like a supermarket shelf that seems to proliferate with more and more brands to choose from, the financial market will soon offer us a surfeit of BPO companies in which to invest our retirement money.

Sutherland and Genpact, both from India, are among those queuing to sell shares to the public for the first time. They will join the battle for investors' capital, a fight already being fought by publicly traded companies PeopleSupport and eTelecare. As some in the Philippines like to quip, "the more, the many-er."

After the bumper debut by EXLService Holdings and WNS on Nasdaq and NYSE, respectively, Rochester, New York-headquartered third party BPO service provider Sutherland Global Services, is eyeing a US listing to raise close to $250 million. At the same time, it is also learnt that Genpact, one of the country’s largest BPO firms, is mulling a US listing through an IPO to raise over $600 million for the company and its promoters.

The company, previously part of US-based General Electric, is planning to offload about 15% equity through a public float on either Nasdaq or New York Stock Exchange later this year, sources said. The company’s major shareholders — GE and US-based private equity giants Oakhill Capital and General Atlantic — are likely to sell part of their holding through this IPO, which could value the company at around $4 billion.

Genpact has appointed three US-based investment banks — Morgan Stanley, JPMorgan and Citigroup — for the IPO and it may file the regulatory prospectus in the next few weeks, the sources said.

Support for PeopleSupport

Is it time to buy PeopleSupport, now that concerns about its loss of client Vonage ($14 million of revenue in 2006) led to a steep drop in its stock price? Or is it time to hang up on Chairman, CEO, and President Lance Rosenzweig?

Tasha Subedar's posting on Seeking Alpha has this:

Further, PeopleSupport sports a pristine Balance Sheet with $140.5 million in cash / securities (~5.75 per share) and no long term debt. This provides the Company with the much needed gun-powder to make investments in infrastructure as well as to make opportunistic acquisitions to broaden and complement its current capabilities and service offerings.

With its 38% drop, I believe that expectations have reset, and this results in the potential for tremendous upside. Note, also, that PeopleSupport would make a very attractive acquisition candidate for some of the larger BPO / Contact Center players, especially after last Friday's drop.

Fundamentally the long-term growth story has not changed a bit since PeopleSupport priced its secondary offering at $20 per share in November, 2006. BPO is here to stay and PeopleSupport represents one of the brightest prospects to continue to ride this strong secular growth theme.

Over at the Motley Fool, Rich Smith has this:

I must admit -- after reading those comments, I'm starting to get interested in PeopleSupport myself. Despite disappointing analysts with its fourth-quarter earnings and Q1 2007 guidance, the firm is growing its revenues rapidly, already
generates free cash flow, and has 41% of its market cap backed up with cash in the bank. Combine these strong fundamentals with a business sitting squarely in the middle of a long-term trend towards outsourcing in an increasingly "flat" world, and PeopleSupport looks like a strong contrarian pick to this Fool.

And finally, here's Frank Lara at 24/7 Wall Street:

Cry-babying aside, outsourcing is going to keep happening, so it's time for us to make some money off of the companies raking in the cash. PeopleSupport is a Business Process Outsourcing (BPO) provider - they reduce costs, improve performance and increase revenues for their customers with the majority of their services being performed in the Philippines. They brought in $62M in revenue for 2005 and $110M in 2006. PSPT is making a nice little profit, $22.8M in net income for 2005 and $14M. Their stock is trading near its 52-week low at under $12 a share and just fell from the $20's a few weeks ago.

Read PSPT's discussion on its latest quarterly earnings here.

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?

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?