Ramadorai

NEW YORK – After months of speculation, Tata Consultancy Services Ltd. has reached an agreement with Citigroup Inc. to purchase its India-based outsourcing division, Citigroup Global Services Ltd., for $505 million in cash.

The transaction is the largest-ever acquisition for Tata Consultancy Services. What’s more, the IT-services giant also bagged a $2.5 billion contract to provide process-outsourcing services, application development and infrastructure support to Citigroup and its affiliates over the next nine-and-a-half years.

In terms of monetary value, the services contract is the biggest win ever for an Indian corporation. For Tata, it is a major coup: the company edged out rivals such as Armonk, N.Y.-based IBM Corp. and French IT company Capgemini S.A.

“This is a landmark acquisition for 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,” Subramaniam Ramadorai, Tata Consultancy Services chief executive officer and managing director, said in a statement. “This transaction will complement our domain expertise and bring new capabilities to TCS that will help drive growth going forward.”

The purchase agreement was finalized Oct. 8, just two days after Nomura Holdings Inc., Japan's biggest securities firm, agreed to buy the back-office operations of Lehman Brothers Holdings Inc. in Mumbai, which employed 3,000 workers. Nomura is also buying the Asian, Middle Eastern and European operations of New York-based Lehman, which filed for bankruptcy last month.

The acquisition will enable Tata Consultancy Services to more than double its back-office-worker headcount, thus boosting its lead over rival Indian IT-services providers Infosys Technologies Ltd. and Wipro Ltd. Currently, Tata Consultancy services has over 10,000 employees in its outsourcing units around the world and generates more than $150 million annually just by providing services to Citigroup.

Formerly known as E-serve International, Citigroup Global Services began as a business-processing arm for Citigroup India in 1992; it expanded in 1998 to service Citi’s operations in North America, Europe, India, Singapore, and the rest of Asia Pacific. Today, Citigroup Global Services employs more than 12,000 people at offices in seven cities across India: Mumbai, Chennai, New Delhi, Bangalore, Hyderabad, Kolkata and Gurgaon. The division projects that its 2008 revenues will reach $278 million.

“This is a great transaction that benefits all parties – Citi, our customers, our employees and TCS,” Dan Callahan, Citigroup’s chief administrative officer, said in a statement. “Our customers require access to increasingly complex processing solutions and this relationship will achieve a ‘best-in-class’ technology model that capitalizes on both [Citigroup Global Services’] expertise in financial services and [Tata Consultancy Services’] expertise in process optimization. TCS will offer [Citigroup Global Services] stronger growth potential and superior continued services to Citi clients around the world.”

Citigroup’s decision to sell off its Indian outsourcing unit comes amid a deepening global financial crisis, which has forced banks worldwide to sell off key assets to raise funds. Among U.S.-based banks, Citigroup has sustained the largest amount of losses from the collapse of the mortgage market – about $61 billion, according to company data – followed by Wachovia Corp., which has lost about $53 billion. Globally, asset writedowns and credit losses have cost the world's biggest banks and securities firms a combined $593 billion, according to data compiled by financial news and data provider Bloomberg LP.

Callahan hinted that the sale of Citigroup Global Services is connected to the parent company’s shaky financial situation. “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,” he said.

Citigroup has announced other cost-cutting measures in recent months, including the elimination of 500 payroll jobs and a massive, 90-percent reduction in the number of independent mortgage brokers that it does business with, to just 1,000 brokers. In contrast, the 500 job cuts represent about 5 percent of the company's mortgage operations across the United States.

In the spring of 2007, Citigroup announced that it would slash spending by $10.4 billion over the following three years, including global layoffs, moving more jobs overseas, and reductions in IT, including closing half of its 42 data centers.

The sale “fits squarely into [Citigroup chief executive officer Vikram Pandit’s] goal to reorganize Citi, strengthen our balance sheet, divest assets that are not aligned with our growth strategy to free up resources that can be better used as investments in higher-growth, higher-return opportunities,'' Sanjay Nayar, CEO of Citigroup India, wrote in an e-mail to employees. “This is a strategic step in Citi's stated objective to focus on our core competencies.''

Thus far, analysts appear to be divided over whether Tata Consultancy Services made the right decision in acquiring Citigroup Global Services. Diviya Nagarajan, an analyst at Mumbai-based financial-services firm JM Financial Ltd., rated it a “very positive move for Tata Consultancy” in an e-mail note to clients, adding that it gives the firm “much needed visibility and stability with a top client in the context of the current demand environment.”

However, the day that the deal was made public, Tata Consultancy Services’ share price tumbled 5 percent on the Bombay Stock Exchange. Year to date, the company’s market value has fallen approximately 49 percent, compared with a 35-percent drop for the Bombay Stock Exchange’s benchmark Sensex index.

Tata Consultancy Services chief operating officer N. Chandrasekaran said the Mumbai-based company, which employs nearly 111,500 people worldwide, will invest significantly in technology upgrades at Citigroup Global Services as part of a program to streamline the company’s operations. He added that Tata Consultancy Services has no plans to merge the newly acquired Citigroup unit with its own operations, and that Tata plans to leave Citigroup Global Services’ current management team intact.