A captive carve out is a global captive operation that is acquired by a third party to provide services to the market. Captive carve outs can take on two forms based upon the operating form of the customer, either financial or strategic.
In the financial buyer scenario, a private-equity firm partially or wholly acquires the captive operation. The goals of the private-equity firm are often tied with capital growth and usually result in an exit from the investment in five years or less. Examples of a financial captive carve outs are British Airways (BA) divesting what today is WNS to Warburg Pincus in 2002 followed by exit via IPO in 2006; and GE selling a stake in GECIS (now Genpact) to Oak Hill Capital and General Atlantic Partners in 2005 followed by exit via IPO in August 2007.
In the strategic buyer scenario, a strategic player in the global services industry acquires the captive operation to integrate it into its existing service offerings and to gain strategic advantage over competitors. For instance, strategic captive carve outs include Infosys’ acquisition of Philips Finance and Accounting (F&A) captive in July 2007; and TCS’ acquisition of the insurance-processing division of Phoenix Life’s captive.
Why Carve Outs?
MNCs such as GE, BA and Citigroup set up captive sourcing operations in global service destinations in the late 1990s to achieve the benefits of labor arbitrage and economies of scale with an increased level of control not provided by third-party outsourcing. Although these captives were considered a success by many measures, over the span of time captive carve outs have encountered one of the following situations:
- When firms want to shift focus to the best: In the Jack Welsh years, GE built GECIS, which though didn’t build light bulbs or complex medical devices that are closely aligned with GE’s core offerings, served as an operating division within GE. According to one former GECIS and Genpact manager, following Welsh’s retirement, GE’s new CEO Jeff Immelt believed that GE’s core business was not outsourcing or offshoring and hence decided to spin it off.
In this case, a change in executive management predicated the focus on core business and the resulting captive carve out.
- In case of changing entrepreneurial spirit in management: In some cases the management of the captive inspire the change. Entrepreneurship interests on the part of management are said to have played a significant role in the carve outs of Genpact, EXL Service and WNS all of which have gone for IPO in 2006 and 2007.
“Entrepreneurship plays a part in most of the captive carve outs we’re seeing,” says Ben Druskin, MD, Citigroup’s investment bank and participant in virtually all of the captive carve outs and resulting IPOs till date.
- When captive is worthier: Setting up and running a successful captive operation is not an easy task. The cost involved in handling captives is 30 percent more than what is required to manage certain third-party outsourcing arrangements. Challenges such as attrition, managing scale, management support and involvement, and rising wages add to the difficulty.
“Success attracts success, and BA was successful in running its captive,” says Ramesh Shah, Chairman, WNS. “But once we stopped growing in scale, BA decided to commercialize the captive and sold its majority stake to Warburg Pincus.”
| Captive Carve Outs |
| Founder |
Conception and growth |
Transformation |
Value |
| BA |
BA founded a captive in 1996 with 30employees, to handle revenue accounting. It grew to 1,200 employees by 2001 |
Acquired by Warburg pincus in 2002, converted into WNS, then went IPO in Oct. ’06 |
WNS today is valued at $961 million trading at 35x multiple of earnings on the NYSE |
| Conseco |
Originally started as a service provider, Conseco acquired EXL in 2001 to provide captive F&A BPO services |
Conseco sold EXL to Oak Hill Capital and FTVentures, which they took public in 2006 |
EXL Service is valued at $521 million trading at a 27x multiple on the Nasdaq |
| GE |
GE founded what today is Genpact in 1997 as a services facility to support multiple business lines |
GECIS Acquired by Oak Hill shared Capital and General Atlantic Partners in 2005, converted to Genpact; IPO in Aug. ’07 |
Genpact is valued at $3.4 billion on the NYSE |
| Philips |
Philips founded a captive F&A BPO and grew it to 1,400 employees across India, Thailand and Poland |
Infosys acquired the division for $28 million in July ’07 |
Acquisition of $28 million along with a $250 million outsourcing contract |
| Citigroup |
It founded eServe in 1992, to handle credit collections and custody operations. eServe grew to 8,000 employees by 2007 |
Following a re-structuring in 2007, Citi is still in negotiations to sell eServe |
eServe is estimated to be valued at between $800 and $1 billion |
| United Utilities |
It founded Vertex in 1996, to provide customer services to third parties |
Acquired by Oak Hill Capital, GenNx360 and Knox Lawrence; sold for over $427 million in Sept. ’06 |
Estimated valuation of Vertex is between $800 million and $1 billion |
| Unilever |
It founded Indigo in 2003 to serve as a financial shared services center. It grew to 600 employees by 2006 |
Capgemini acquired a controlling stake in Indigo |
Not disclosed |
| Phoenix Life |
It set up a captive and third-party BPO services for the insurance industry |
Sold to TCS for an undisclosed sum estimated to be under |
Worth significantly more because of a diluted TCS trading multiple
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Source: David L. Ross and Associates
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