Vertical Focus Pays Off for Headstrong

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Last month, I wrote about the importance of services offering focus for optimizing enterprise value for technology consultancies.  Today saw a great example of the power of this concept, with the announcement that offshore BPO firm Genpact (NYSE: G) has signed a definitive agreement to acquire privately-owned, Fairfax, VA-based business integration consultancy Headstrong for $550 million in cash.  The deal, which is expected to close by the end of May, works out to 2.5x Headstrong’s 2010 revenue of $217 million and approximately $150,000 for each of its nearly 3,700 employees.

Headstrong was founded in 1981 and has developed into the leading independent technology consulting firm focused on the capital markets vertical.  Capital markets clients account for roughly 71% of revenue and the company has 1,500 industry domain experts across the globe while counting 9 of the top 10 US investment banks as customers.  The firm has combined its vertical focus with deep expertise around global delivery, including offshore centers in India and the Philippines.

Genpact, which was founded by GE in 1997 as an independent business unit focused on providing business process management via an offshore model, was spun out of GE in 2005 and was listed on the NYSE in 2007.  It enjoys a $3 billion enterprise value, has over 43,000 employees and generated 2010 revenue of $1.26 billion, 86% of which came from BPO services, with the remaining 14% coming from ITO work.  The firm has been actively working to reduce its client concentration with GE, which accounted for 38% of 2010 revenue, with a big push being expansion of its stable of banking, financial services and insurance (“BFSI”) clients, which accounted for 39% of 2010 revenue.  The Headstrong transaction would materially accelerate this progress by reducing the GE revenue percentage on a pro forma basis to 32% and increasing the BFSI vertical to 48% of pro forma revenue.

The transaction is in line with the consistent theme in my conversations with offshore firms on the topic of their acquisition wish lists.  They almost without exception have little interest in US consultancies without a strong measure of vertical focus.  Whether it be the most popular industries—financial services and health care—or other less frequently named verticals such as manufacturing and energy/utilities, these buyers look for vertically-aligned firms that may be integrated relatively cleanly into their industry-aligned go-to-market business models.  At the same time, they greatly prefer firms that have a strong focus on work that is portable to global delivery models.  In the case of the Headstrong, Genpact found a firm focused on both of these wish list priorities.  As a result, Headstrong found itself the recipient of a very attractive all-cash transaction at an outstanding 2.5x revenue multiple.  Focus, focus, focus…


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