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Merge and Emerge: Necessity and Vision Lead to Combining of Chinese Providers

by Michael Rehkopf

Chinese information technology services companies HiSoft and VanceInfo Technologies recently announced a tax-free, all-stock merger of equals that is expected to close by the end of 2012. The merger confirms and extends the story we highlighted about the emerging Chinese provider group in our 1Q11 TPI Index call: China-headquartered service providers, even those that have been predominantly active in the West, will make every effort to capitalize on the fertile Chinese outsourcing market.

The merger signals a significant step in the evolution of Chinese outsourcing providers and will undoubtedly be welcomed by the Chinese government. There are currently thousands of Chinese providers, most small firms with fewer than 1,000 employees. A small number of this subset are mid-tier, with 1,000 – 10,000 employees. Very few of these are achieving scale, with more than 10,000 employees. The new merged company, with 23,000 employees and US$670 million in revenue, will become the largest Chinese provider. We can expect pressure on other bigger firms to make similar strategic moves in the relatively near future. Few other emerging provider groups have ever known such a promising market so close at hand. The HiSoft/VanceInfo (VIT) merger will enable a more balanced geographic mix to address growth opportunities domestically as well as globally. HiSoft’s Western/China revenue mix is 77 percent/23 percent, while VIT’s is 52 percent/48 percent. Together, they will likely be better positioned to tap opportunities both inside and outside China.

 

The merger, if executed well, should position the combined firm to win sizeable contracts within the domestic Chinese market and to gain experience in handling scale and accommodating diversity. Over time this will better equip the company to serve clients in other large global environments outside China.

At the same time, the likely rationalization of the top-heavy management team as well as the other cost synergies that have been flagged will be aimed at boosting the share price and potentially providing an exit path for the larger initial U.S. stock market listing investors in each company.

Eighteen months ago, we noted that the size of the leading Chinese providers by employees and revenues was roughly equivalent to the size of the leading providers in India a decade ago. With the advent of this new, larger company and perhaps other mergers to come, it appears that the Chinese providers are positioning themselves to take a larger role on the world outsourcing stage.

About the author

Mr. Rehkopf brings 30 years of experience in operations, strategy and sourcing, working for Australian, Canadian, German, Japanese and US companies in business process and IT to ISG’s clients. He applies his diverse industry experience with his university background in finance and accounting, IT and dispute resolution to assist clients in the development of business strategies and the implementation of sourcing strategies, including the associated evaluation, negotiation and organizational change.