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IBM's BPO Business Sale Can Lift Profit Margins

Posted
9/18/2013 4:17:00 PM
By: Trefis
Referenced Stocks:ACN;BPO;HPQ;IBM

International Business Machines ( IBM ) signed a definitive agreement to sell its worldwide customer care business process outsourcing ( BPO ) services business for $505 million to Synnex. Under the terms of the deal, IBM will receive approximately $430 million in cash and $75 million in stock. The deal is expected to close in the coming months and will places IBM's BPO business under Concentrix Corporation, the global business services division of Synnex. Additionally, Synnex will enter a multi-year agreement with IBM, and Concentrix will become an IBM partner for BPO services.

IBM sold this business unit as part of a long-term strategy to shift its focus to verticals in which it can garner higher margins. The sale follows IBM's divestiture of other relatively low-margin businesses such as retail store solutions (RSS), hard drives and PCs. We believe that margins in traditional customer care BPO business are substantially lower than some of the new business segments such as cloud based total outsourcing solutions and business analytics. In this article, we will explore how IBM will benefit from this deal.

See our full analysis on IBM

IBM To Enhance Focus On New Initiatives

IBM's technology services and global business services divisions together generate nearly $60 billion in revenues and contribute over 35% to the company's stock value according to our estimates. In its 2015 roadmap, IBM stated that new initiatives such as cloud computing, big data analytics, social and mobile will be the key driver for revenue growth.

Social, Mobile, Big Data and Cloud technologies are transforming customer care solutions globally and companies are leveraging technology to offer better customers services across traditional and new channels. IBM has spent billions of dollars building its business process outsourcing market globally with a number of acquisitions that include Keneax and Emptoris etc in the past two years. With this sale, IBM can now plough back some of the cash into these high margin businesses and focus on building its cloud based outsourcing capabilities.

Additionally, in the past few quarters, the company has been restructuring low margin outsourcing contracts to improve profitability. IBM has been successful in increasing its profit margins, but restructuring these contracts has negatively impacted GTS revenues. As per the deal, IBM can outsource some of its low margin BPO business to Synnex, which will further help in improving its profit margins.

We believe that Concentrix can provide better services to IBM and its clients as it will enjoy economy of scale due to a bigger share in BPO industry. Concentrix runs customer care call centers for many businesses such as banks, insurance firms and healthcare companies. It also provides front and back office services for retail stores and banks, and processes claims for insurance companies. Synnex believes that Concentrix can become one of the 10 top providers of CRM BPO services, an industry that generates more than $55 billion revenues annually.

We currently have a $234 Trefis price estimate for IBM , which is 20% above its current market price.

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