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.

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.

Manila's Construction Boom

There was a time when property developers had to rely on a "build it, and they will come" strategy. Now the world has turned -- all the big boys with capital and spare land are being approached by BPOs, i.e. "we have come, please build it." The larger BPOs are ready, willing, and eager to take up entire buildings and sign long-term leases in their rush to expand. Which goes to show that the constraint for the Philippine economy's growth engine isn't the ability to sell its services abroad. BPOs with U.S.-facing businesses are so confident of demand that they are snapping up any sizeable office space that comes onto the market. What's holding back the boom are domestic capacity constraints, be it buildings with the right cabling, or qualified managers to manage the pell-mell growth. But have faith -- the capitalist system is responding to remove those constraints . . .

SM Investments Corporation, one of the Philippines’ largest conglomerates, broke ground on its latest built-to-suit project in Makati City.
The firm disclosed to the Philippine Stock Exchange (PSE) yesterday that the project, to be called SM Makati Cybezone, is a 4- storey building at Sen. Gil Puyat Avenue, due for completion in Q2 2008. Located at the heart of the Metro’s business district, SM Makati Cyberzone will have a gross floor area of 18,700 square meters and will be occupied by eTelecare Global Solutions, Inc.
"With the growing presence of the BPO industry comes also the growing need for spaces and integrated office facilities," said SMIC vice chairman Henry Sy, Jr.
He added that "the SM Group is more than prepared to answer those needs, as we have aligned with the market demands of this growing industry to provide well-planned and integrated office facilities to BPOs and Contact Centers in strategic locations.". . . .SMIC also broke ground for its second business process outsourcing (BPO) building for PeopleSupport at the SM Baguio Cyberzone recently.

WaMu Chooses Cebu

Washington Mutual (stock symbol: WM) is putting in a captive operation in Cebu, the Philippines' second-largest metropolitan area.

Joel Mari Yu, Cebu Investment Promotions Center managing director, announced the entry of Washington Mutual Inc., one of US’ leading retailers of financial services catering to consumers and small business banks. He said WaMu will be among the locators of a 12-story building that will be constructed in the Asiatown IT Park (AITP).

While WaMu's entry into the Philippines will mean an addition of 1,500 jobs to the country's burgeoning BPO industry, what happens to PeopleSupport?

Hither They Will Come

PeopleSupport's annual report has this to say as to why its profits rose in 2006:

Excluding the income tax benefits, the increase in net income was primarily attributable to growth in our customer management business, which enabled us to build revenues, and our move to the Philippines, which allowed us to reduce our operating costs, improve our margins and offer cost savings to our clients.

The point isn't that PeopleSupport will continue to be a profitable entity. It's that the relentless pursuit of it by companies in the U.S. makes it impossible for them to ignore the significant savings available, if only they locate in lower-cost countries like the Philippines. The hundreds of thousands of corporations seeking better bottom lines will continue to turn to companies such as PeopleSupport, eTelecare, Convergys, etc.

And when BPO companies sell customer-care services to a Fortune 500 company, and achieve 40% gross margins doing it, powerful incentives are created for even more people to enter the business. In that vortex of searching-for-savings will blossom the Philippines' sunrise industry.

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.