Devott Insights: BlackStone Leaves Quietly & Traditional Outsourcing Model is Difficult to Continue
Source: View: 244 Date: 2016-02-02

A piece of information has covered the entire world on February 1st, 2016.

On February 1st of 2016, according to information from “The Wall Street Journal”, BlackStone Group, the private equity firm in USA is trying to sell Pactera the Chinese IT outsourcing company with 1 billion USD. BlackStone has employed Morgan Stanley to charge for selling process. After buyers expressed their preliminary intend, Morgan Stanley has provided preliminary information for potential buyers. The selling process currently still stands at preliminary stage; thus it has several months to accomplish final transaction. Currently, there is no more information.

Pactera was established by the combination of VanceInfo and Hisoft that were leading software outsourcing enterprises in August 11th of 2012; the original stock of Hisoft still kept at global precise market of NASDAQ. Pactera has 24,000 employees who can provide business/IT consultant, solution and outsourcing services in financial service, hi-tech, telecommunication, tourism and transportation, energy, life science, manufacturing, retail and distribution that is the biggest service outsourcing provider in China and has been the No.1 of TOP50 organized by Devott/ for three years.

On March of 2014, BlackStone as leader finished privatization deal of Pactera with price of 600 million USD. After invested Pactera, BlackStone achieved the control right of this company. At that time, all industry believed that was a kind of strategic adjustment of privatization from Pactera to promote and seek for transformation and re-listing via strong capital operation that was a good choice for both sides. However, after two years, the growth of Pactera can’t meet expectation of Blackstone that brought many difficulties for Pactera to re-list. In the first quarter of 2015, the business income of Pactera was 25.8 million RMB, the operation profit rate decreased to less than 3% that was lower than 8.7% of 2014 at the same time. Moody’s indicated that the declination of profit rate from Pactera because of increasing salary in China and weak performance of economy in Europe that decreased enterprise credit rating of Pactera from Ba3to B1. That was closely relating with whole economic environment and service outsourcing industry trend in China; however, on the other hand it also reflected the problems of Pactera in enterprise strategy adjustment and practical operation.

According to a series of information published by Pactera in recent years, we can understand its hard works to deeply develop vertical industry. In July 21st of 2015, in “The Prediction and Analysis of Chinese Banking IT Solution Market in 2015-2019” published by IDC, Pactera was No.2 of comprehensive list of banking industry IT solution and became one of only two Chinese finance industry solution providers in “FinTech100” as well as one of Chinese company with best ranking. In November 25th of 2015, Pactera achieved award of “The Excellent Big Data Application Developer in 2015”. In January 13th of 2016, Pactera purchased Blue Fountain Media that is professional digitalized service institution in NY to promote digitalized transformation. It is seen as medium choice for BlackStone to accomplish spin-off listing via strengthening competency of vertical industry, but it failed.

The last choice for Blackstone is to seek for acceptance of offer. According to information, potential buyers may spend 800 million USD to 1 billion USD to buy Pactera who may come from finance industry or other relative industries. Some potential buyers may hope Pactera to be listing in China or to integrate with domestic listing companies. Whatever, considering relative fiscal cost, risk cost and opportunity cost, it means Blackstone hasn’t achieved any profit from the biggest private equity investment in China that means exist from market with fair price.

I believed the selling behavior from Blackstone may have some meaning for other enterprises including isoftstone, Camelot, ChemePartner, Asiainfo-Linkage and 360 under wave of privatization. As the first enterprise that restarts capital operation after privatization, selling also means other enterprises will have difficult way to be re-listing. Meanwhile, from angle of industry development, it further means traditional service outsourcing focusing on human beings and cost can’t go farther. After emerging technology revolution, two kinds of way- product orientation and service orientation may be seen as the same one currently that means no matter software industry or service outsourcing industry, they will be uniformly summed as service and business model that focusing on new technologies and platforms, no longer as selling labors, which will provide service via cloud, intelligent and mobile models and platforms concentrating on core demands of customers that will be value orientation model of solving problem.

At last, I still believe that according to current situation, it is the best solution for Blackstone and Pactera to split and rebuild and to sell. Split finance service, big data, digitalized service and other businesses with good development trend and huge potentials from whole industry, then rebuild and re-list; at the same time directly sell traditional or second-line businesses will bring more profit than whole selling; meanwhile, for Pactera the super battleship in China, to abandon scaled development and to seek for independent operation and profit orientation may be good choices.

This post is a personal or group view of Research and Advisory members and don't necessarily represent Devott's positions, strategies or opinions.

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