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October 8, 2008

TCS buys Citigroup’s services arm for $505m: Updated

Citigroup has sold its India-based Citigroup Global Services arm to Tata Consultancy Services (TCS) for $505m in cash.

By Jason Stamper

Also under the agreement, Citigroup signed a $2.5bn deal for TCS to provide process outsourcing services to Citigroup and its affiliates over a 9.5 year period.

Citigroup Global Services has around 12,000 employees in India and expects revenues of approximately $278m in 2008.

In an interview with CBR, TCS’ N Chandrasekaran, executive director and COO, said there would be no redundancies at Citigroup Global Services as a result of the acquisition. “This is about growth, not cutting,” he said.

Asked whether there is sufficient ‘wiggle room’ in the 9.5 year deal for TCS to maintain its margins, he said: “I think so. We took almost a year structuring this deal and we have built enough structures in there to protect our margins and get the right price. There are also mechanisms in there to ensure that Citigroup continues to get the right quality service from us.”

Chandrasekaran said that TCS will combine some of its products in the financial services sector with Citigroup Global Services’ business process outsourcing capability to create what he calls ‘banking platforms’. But he said that it will take “a few years” before it’s in that position.

Chandrasekaran said that TCS’ attitude is to only do acquisitions when they are a good strategic fit, and that it is always on the lookout for such acquisitions.

The agreement builds upon the existing relationship between Citigroup and TCS whereby TCS provides application development, infrastructure support, help desk and other process outsourcing services.

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“This is a landmark acquisition for TCS,” said S. Ramadorai, CEO and MD, TCS, “helping us not only acquire new capabilities in the banking domain but also underscoring the importance of our long-term, sustainable relationships with our large customers, including Citi. This transaction will complement our domain expertise and bring new capabilities to TCS that will help drive growth going forward.”

Don Callahan, chief administrative officer at Citigroup, said: “This is a great transaction that benefits all parties – Citi, our customers, our employees and TCS. Our customers require access to increasingly complex processing solutions and this relationship will achieve a ‘best in class’ technology model that capitalizes on both CGSL’s expertise in financial services and TCS’s expertise in process optimization.”

“TCS will offer CGSL stronger growth potential and superior continued services to Citi clients around the world,” said Callahan. “This transaction is expected to help reduce operating expenses related to business processing and will allow us to focus on our core financial services competencies.”

TCS’s enhanced scale and expertise will provide service improvements to Citigroup and its customers, the firms said.

Citigroup Global Services is said to be one of the largest providers of business processing outsourcing services within the banking and financial services sector, providing end-to-end process management across the BFS spectrum and a broad array of services to Citi’s consumer, corporate and global wealth management businesses worldwide.

The parties expect to close the transaction in the fourth quarter of 2008. Merrill Lynch acted as advisors to TCS in the deal.

CBR Opinion

This is a fantastic deal for TCS. Not only does it get an extra 12,000 consultants at a time when it’s becoming increasingly difficult for the Indian services firms to recruit the right talent, but it also gets it for just 1.8 times annual revenue. Not only that but it’s guaranteed $2.5bn in business from Citigroup itself over the next 9.5 years.

For Citigroup, the $505m cash will be useful given the latest economic turbulence, while there was never a good reason for it to be running its own business process outsourcing (BPO) operation in the first place. Now it can leave it to the experts and concentrate on its own areas of expertise.

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