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More Mergers Ahead For BPOs

More Mergers Ahead For BPOs

/ Current Issue, Operations, Strategy, Customer Experience
More Mergers Ahead For BPOs

Several trends continue to drive change with these companies.

In partnering with business process outsourcing (BPO) companies, it helps – and pays – to know what is happening in the BPO market before sourcing and working with these service providers.

You will want to be sure to partner only with those businesses that are going to be around and will be able to meet your needs for the long term.

There is good news here, however. In a period marked by economic uncertainty and fluctuating interest rates, the BPO sector has continued to show strength in existing as well as new markets.

According to IBISWorld, the global BPO Services industry revenue has been increasing at a CAGR (compound annual growth rate) of just under 2% over the past five years and is expected to grow at a CAGR of 1.2% to reach $77.2 billion by the end of 2029.

Economic volatility, business uncertainty, and increasing costs have all induced companies to explore outsourcing their front- and back-office functions. In addition, expanding end-markets such as finance, healthcare, and retail are expected to continue to drive market growth.

Trends Driving Dealmaking Involving BPOs and Contact Centers

The contact center BPO sector has long been characterized by aggressive M&A (merger and acquisition) activity. Many of the names of companies from 10 years ago, including SYKES, Convergys, SITEL, APAC and West, have long since disappeared. And there is every indication that this pattern will continue.

Here are several trends that are expected to drive sector M&A in 2024.

1. Equity capital availability. The ample supply of equity capital has continued to serve as a catalyst for M&A, with both strategic and financial buyers actively competing for high-quality assets.

2. Value creation. In today’s competitive landscape, acquisitions remain a primary lever in value creation with buyers looking to grow their geographic footprints, enhance technology, expand service offerings, and enter new industry verticals. These value drivers will continue to fuel dealmaking, with consolidation expected to continue across a fragmented landscape.

3. Expansion opportunity. The opportunity to expand into new industries, especially healthcare, retail, and finance, continues to play a significant role in driving deal activity. Rising wages and increased operating costs have helped steer employers towards BPO companies as a method of cost control.

In 2021, many companies ramped up hiring to meet increased demand as the economy recovered from the COVID-19 pandemic. However, as economic growth has slowed, workers are now being laid off, which has directly benefited BPOs that can supplement a diminished workforce and meet clients’ operational needs.

Increased end-market demand can be attributed to the specialized expertise needed from contact center agents.

For example, in the healthcare industry, agents are required to have a deep understanding of medical terminology and regulatory compliance.

Similarly, the hospitality industry requires agents who can deliver personalized and seamless guest experiences. Meanwhile retail and consumer-centric businesses require agents who are well-versed in product knowledge and customer engagement.

As a result, companies are increasingly outsourcing services to BPOs and contact centers with a proven track record and expertise in these industries.

A recent example of a strategic acquisition illustrating this trend is Continuum Global Solutions’ acquisition of Faneuil (September 2023), a BPO specializing in the public utilities, government, and healthcare services industries.

With the acquisition, Continuum added to its growing portfolio of industry verticals which includes healthcare, media and telecommunications, and the public sector.

4. Technology investment. In the current environment, it has become more important than ever for companies to invest in technology to stay relevant for their customers.

Cloud-based platforms, speech recognition, AI (artificial intelligence), and automation drive more personal and empathetic experiences. All while delivering higher quality service and improved experiences that are being demanded by customers.

Technology is not replacing the human element but rather enabling increased productivity and enhancing the CX (customer experience). Companies that embrace the tech-with-talent model elevate the agents’ role by automating simpler tasks and enabling the agent to focus on more complex customer interactions.

...BPO organizations are shifting away from only providing contact center services to offering...financial, accounting, and IT services, making them more attractive to buyers.

An example of this is TTEC’s acquisition of Avtex (March 2021) whereby TTEC augmented its capabilities in the areas of cloud services, mobile connectivity, CX, infrastructure, managed services, and business intelligence.

5. Complementary, expanded offerings. Acquirers have increasingly targeted businesses with expertise in specialized business process outsourcing to complement their core contact center offerings.

Furthermore, BPO organizations are shifting away from only providing contact center services to offering other back-office functions including financial, accounting, and IT services, making them more attractive to buyers.

This rationale for consolidation has created ever-larger industry participants offering an ever-broader range of services - and enabling clients to streamline back-office functions - through a single provider.

MAI’s acquisition of WASI (March 2023), a privately held contact center operator based in Nebraska, is an example of a company looking to add value with new services capabilities. With the acquisition, MAI now has more than 200 employees, including contact center agents in all 50 U.S. states and in Costa Rica.

6. Location(s). “Location, location, location” is a well-known phrase in real estate. But it also holds value in other industries, particularly in the BPO contact center sector given that geographic expansion enables companies to enter new markets. Which, in return, opens them up to new customer bases.

Categorized into three geographic concentrations - onshore, nearshore, and offshore - the BPO contact center landscape has experienced a recent resurgence in the demand for nearshore and offshore providers.

Rising labor costs and attrition of domestic agents have widened the cost differential between domestic and international solutions. This shifting landscape has led companies to look at new geographic options to optimize cost-efficiency and talent availability.

Concentrix, a leading provider of customer experience services and technologies, acquired Webhelp, a recognized leader in the market, in March 2023.

This transaction is an example of two larger industry participants combining to expand their overall geographic coverage. The merged company has established one of the most robust, well-balanced global footprints in the industry, enhancing Concentrix’s presence in Europe and Latin America, and establishing its African footprint, all at scale.

Webhelp’s network of contact centers adds over 25 new countries to the combined company, with a diversified revenue contribution and footprint across more than 70 countries. The new partnership brings a set of anticipated benefits including a diversified customer base, value-added digital capabilities, and additional support located throughout three continents.

Similarly, the rationale for Konecta’s merger with Comdata in April 2022 was to expand the geographic footprint of the two combined companies. Konecta had historically been strong in most of the world’s Spanish-speaking areas – the Iberian Peninsula, northern Africa and Latin America.

By contrast, Comdata was renowned for its coverage of mainland Europe, especially Italy and France. The combination of Konecta and Comdata created the sixth largest company in the BPO sector with close to 2 billion euros ($2.1 billion) in annual revenues.

Of more consequence, the merger created a company that can offer services in 30 different languages utilizing a global footprint that provides “best-shoring” to a customer base of more than 500 large corporates.

By 2029, China and India are expected to generate considerable revenue share and boost regional market growth. The report cited improved infrastructure, increasing government spending on BPO, BPO-centric education, and an emphasis on employees’ communication skills.

These two established geographies, along with newer markets such as South Africa and the Caribbean, are likely to be the focus of much acquisition interest in the coming years.

Valuations

Historical public company valuation multiples in the contact center services subsector have held relatively steady at elevated levels, driven by favorable industry tailwinds and a buoyant capital markets environment.

Increasing adoption of business process automation, AI, Internet of Things, cloud, and other emerging technologies will drive [global BPO] market growth...

However, multiples have come under pressure in recent quarters owing to major concerns by investors regarding the negative impact that AI will have on this people-centric industry vertical. The median EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple was 6.8x in Q3 2023, representing a 10.3% decrease from Q2 2023.

Broadly, M&A valuation multiples in the contact center services subsector have also remained steady, which has predominantly been the result of strategic and financial acquirers engaging in competitive bidding processes for high-quality middle market assets.

Looking Ahead

The global BPO market is poised for continued growth. Increasing adoption of business process automation, AI, Internet of Things, cloud, and other emerging technologies will drive market growth as companies look to implement new workflows and capabilities that address the changing needs of customers.

Furthermore, demand from rapidly expanding industry verticals will remain a key driver of market expansion.

We expect M&A to continue to shape a shifting landscape of BPOs and contact centers across a variety of market sizes. The emergence of large-scale transactions will pressure larger industry participants to make their own strategic acquisitions.

Similarly, when one company merges with another, there will inevitably be a change in workflow at the executive level leaving skilled management looking for new opportunities. This outcome will enable mid-level competitors to bring in talent with significant subject-matter expertise to pursue aggressive acquisitive growth strategies.

Peter J. Hill

Peter J. Hill

Peter J. Hill is a Managing Director and leads the Professional Services investment banking group at Brown Gibbons Lang & Company (BGL), an independent investment banking and corporate financial advisory firm. Peter has significant experience in the BPO and contact center sector, working on a variety of M&A and financing transactions.

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