BANGALORE, April 8, 2004
Reuters

International Business Machines Corp. <IBM.N > said on Wednesday it would buy Daksh, India's third-largest technical and customer support services firm, in the biggest acquisition yet in the nation's booming $3.5 billion outsourcing sector.

Both companies declined to give financial details but industry sources estimated the buyout, the U.S. giant's first in India, at between $150 million to $200 million, making it one of the biggest foreign acquisitions in India in recent years.

The deal, expected to be closed in May, will give the world's largest computer maker -- which already has substantial technical operations in India -- access to privately held Daksh's 6,000-strong employees, who mainly offer call-center services to 13 clients including Internet retailer Amazon.com <AMZN.O >.

The deal comes at a time when outsourcing has become a hot issue in the U.S. presidential campaign, as candidates debate the consequences of white-collar jobs being moved abroad. U.S. companies have argued that the savings could help them hire more people at home.

IBM has said it would create about 4,500 net new jobs in the United States in 2004 but plans to move about 3,000 positions to developing nations. Some investors have complained that IBM is trying to cut costs by exporting jobs without regard for the long-term effect on the company or employees.

"This investment is indicative of our commitment to supporting our clients in this region and leveraging local capabilities," Abraham Thomas, general manager at IBM India, said in a statement.

The purchase of Daksh, based in Delhi satellite town Gurgaon, strengthens IBM's already significant muscle in India, where it employs 9,000 people in software, services and support work.

Other computer services companies are also making deals to get quick access to a big pool of low-cost Indian labor. Perot Systems Corp. <PER.N > in December bought the remaining stake in India's HCL Perot Systems for $105 million. Indo-American firm Cognizant Technology Solutions acquired Ygyan Consulting, with a work force of 85, in February.

"The IBM acquisition is positive for the overall India-based services industry, it could set the stage for more deals," said Joe Vafi, analyst with Jefferies, adding that large technology services companies like Hewlett-Packard Co. <HPQ.N > and Computer Sciences Corp. <CSC.N > are likely to follow suit.

Daksh, which means "alert" in Hindi, is set to become part of IBM Business Consulting. The four-year-old firm is estimated to have doubled revenue to about $60 million in the year to March 2004, and had been planning a public issue of shares before it agreed to be bought.

"This deal means that business process outsourcing companies need to be part of a bigger outfit," said Ravi Ramu, chief financial officer of mid-sized software exporter Mphasis BFL <MBFL.BO >, which has a fast-growing back-office unit, MsourcE.

Daksh is an early mover in a sector that is thriving by tapping India's English-speaking workers to provide services such as accounting and insurance claims processing to foreign customers looking for low-cost outsourcing.

The company's rivals include MsourcE and Wipro Spectramind, India's largest back-office firm which is part of Wipro Ltd <WIPR.BO >, the country's third-largest software exporter.

Infosys Technologies <INFY.BO > and Satyam Computer <SATY.BO >, the No. 2 and No. 4 software firms, have also set up subsidiaries to offer back-office outsourcing.