AIG'S Indian software unit on block

Chandra Ranganathan & Boby Kurian, Chennai/Bangalore
The Economic Times

Patni Computer and MphasiS are among the potential bidders for the Indian software unit of the troubled insurance giant AIG, said a banking source familiar with the development.

The software unit, AIG Systems Solutions, is on the block as part of the insurance behemoth’s plans to divest assets globally and focus on its core business.

Deloitte is running a sale process for the unit, which has over 1,000 employees and annualised business estimated at $30 million. The seven-year-old AIGSS has centres in Chennai and Kolkata. The deal making is still in preliminary stages. Other mid-tier Indian IT firms like MindTree and a few private equity investors could also join the race, although AIG’s lack of assurance on a committed business flow in the future has dampened the interest of some suitors, sources added. Polaris, TCS and MindTree figure in AIG’s vendor list.

The recent sale of the captive back-office arms of Citigroup and Aviva came with multi-year assured business contracts from these firms. The issue of business shrinkage as AIG divests many of its divisions is another concern for the suitors. The US Federal Reserve bailed out AIG from bankruptcy by pumping in $85 billion loan in return for majority control.

While AIG said “it does not comment on market speculation”, an MphasiS spokesperson declined to comment. Patni Computer Systems and MindTree Consulting did not respond to e-mail queries sent on Monday. The uncertainty over future business from AIG is likely to impact the deal valuation. One banking source said the deal could be valued at best at one-time revenue, which is around $30 million. But the fact that AIGSS has a high quality team engaged in 70 percent off-shore work could be a positive.

But the big catch is whether AIG would sweeten the deal by offering a long-term outsourcing contract for the buyer. “The history of such deals tells us that whoever buys a captive gets guaranteed business from the owner. I don’t think these buyers will buy without a guarantee of business,” said an analyst with an IT research and advisory firm, who did not wish to be named.

Precedents of a deal of this nature include Citi’s sale of its back-office arms Citigroup Global Services and CITOS to TCS and Wipro, respectively and Aviva’s sale of its captive to WNS. In all these cases, the deal was accompanied by a multi-year outsourcing contract from the parent company.

AIGSS was set up as a joint venture, in which AIG held 80 percent and Polaris Software Lab held the rest. Polaris incubated this company by sharing its physical and communication infrastructure and processes. But when Polaris signed a professional services agreement with AIG Global Services last year, it sold its stake in AIGSS.