Trip to China
by Philip Ma, Managing Director, MergerTech Advisors
Last October our Chairman Marty Wolf came to China and gave a keynote presentation at an AmCham Shanghai IT industry event on Cross-border M&A in the global IT outsourcing industry. Drawing from our experience in working with Indian IT outsourcing companies (ITO’s) on cross-border M&A transactions, he noted how M&A has become an integral part of their growth strategy. Looking at valuation data and growth trends of the Indian ITO’s, it’s clear that the market rewards scale (at least $500M in revenue). In contrast, China now has some publicly traded ITO’s that are trading at higher multiples than their Indian brethren but are much smaller in scale. They are being rewarded for high growth rates, and our thesis is that they will need to drive growth via M&A in order to achieve scale and sustain those high growth rates from an increasing revenue base. You can see the data behind these findings and more detail in Marty’s presentation slides, which are available on our web site here: AmCham_Presentation
Afterward I moderated a lively panel discussion with representatives from Chinese ITO’s and professional service providers to the ITO industry. Some key takeaways from that discussion:
- As with many key industries, the Chinese government has taken an active policy role in developing the ITO industry. Linda Lin from KPMG reported that the government’s 1000-100-10 project launched in 2006 has far exceeded their original goals. Today there are over 9,000 ITO companies in China (compared to the original goal of 1,000), over 500 multinational companies outsourcing to China (compared to the original goal of 100), and more than 20 Chinese cities that are outsourcing hubs (compared to the original goal of 10). While these numbers are impressive, many of the Chinese ITO’s are too small to achieve scale, and consolidation in this space is likely.
- Private equity is flowing into the Chinese ITO space, mainly because of the high growth rates. However, the level of sophistication is perhaps not as high as financial investors in the U.S. or India. With P/E multiples well exceeding 20x on average for publicly traded Chinese ITO’s, who needs sophistication!
- Finding good talent and employee turnover are key challenges for the Chinese ITO’s. 2nd tier cities like Xi’an and Chengdu provide opportunities to find good talent at lower cost and lower turnover rates.
For the remainder of his trip, Marty and I met with senior executives from several of the top Chinese ITO’s. Many have great ambition to challenge India as a center for IT outsourcing, and most are also looking to the domestic Chinese market for growth beyond their classic offshoring model. This is consistent with what’s commonly recognized as a global macroeconomic reality; that China is a key linchpin in pulling the world economy out of recession.