The first draft of the TARP Bill had a provision which, thankfully, did not get passed. Recipients of the TARP money were to not award any new contracts where the labour is going to be based offshore nor were they allowed to do any extension/enhancement of contracts where the labour was to be based offshore. So, the idea was basically to keep offshoring minimal, and at the current level, and also all new deals were to remain in the US. The intentions were very clear in the first draft.
Subsequently, it got watered down and there is a final provision in the TARP Bill where the recipients are not to work with any non- American company.
In reality, all the banks are going to be returning the TARP money this year because the executive compensation is otherwise hit. I was in the midst of discussions with three banks in the US about jointly setting up a low cost operations centre in the US for one quarter. In the last few weeks, they have all come back and asked us not to set up as they have decided to return the TARP money.
The atmosphere is improving, which means that we are coming into a valley or slightly upward zone but that just means that the decline has stopped.
Tough recovery slope
The recovery for the Indian IT services industry will only be a `check-mark' recovery, i.e you lose everything in two quarters while you regain it over eight quarters. The upward slope is much more gradual than the downward decline that happened. The long end will get you back to the same point in, may be, the three-four times the time it took to decline.
At a macro level, the financial institutions have taken $1 trillion of charges cumulatively so far. The worst part is that it is anticipated that the total charges will be about $1.8-$1.9 trillion, which means you have got a further $800-900 billion of charges to take. The new charges will take place on prime mortgages, commercial real-estates and consumer credit defaults because people are losing jobs and this is based on a model of 10-10.5 per cent unemployment rate. That's another scary proposition.
While the recovery is definitely under way, it is a weak and gradual recovery and not one that gives a lot of confidence.
Post-Satyam acquisition plans
We looked at a fairly large-sized, broad-based BPO company and it didn't work out, predominantly due to the valuation issue. We continue to look at acquisitions as we are motivated to get up to 20,000-30,000 employees very quickly, from the current strength of 6,500.
The challenge in this market is that everyone looks at the valuation of 12 months ago and is unable not able to come to terms with the current valuation levels. I do believe that the M&A environment is going to be a little muted, except for whom it is an absolute, basic necessity.
For us as an acquirer, it is difficult to go beyond a certain value for the target company. Average market premium is about 15-25 per cent and not too much more.
Also, once you end up doing the acquisition, it should be an accretive acquisition and should not be dilutive to shareholders.
