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* To pay $550 mln in cash
* Says to fund deal with cash, debt
* Sees deal to add to 2011 profit
* Sees deal to close by May 31
* Shares rise 5 percent (Adds details, background)
By Saqib Iqbal Ahmed and Supantha Mukherjee
BANGALORE, April 6 (Reuters) - Backoffice services provider Genpact Ltd will buy smaller rival Headstrong Corp for $550 million in cash as it seeks to strengthen its financial services offerings.
The purchase of privately held Headstrong, which gets most of its sales from the capital markets, will help Genpact's banking, financial services and insurance (BFSI) business as the economy recovers from the recession.
"BFSI has slightly better margins than the rest of Genpact's business," Chief Executive Pramod Bhasin told Reuters.
The buy widens Genpact's services portfolio, entrenches it well in the financial vertical and makes it a one-stop shop for both IT services and business process outsourcing (BPO), Global Equities Research analyst Trip Chowdhry said.
The deal, Genpact's biggest yet, is the second-largest this year by an Indian IT services company after iGate's purchase of Patni Computer Systems . [ID:nSGE709010]
Mid-sized Indian IT services companies are showing appetite for large deals and are not shying away from paying a premium. They seek to consolidate in the highly competitive space and move into higher-margin businesses, such as consulting.
Genpact's offer is about 2.5 times Headstrong's estimated annual revenue while iGate had paid $1.2 billion, or 1.8 times Patni's revenue.
The deal also allows Genpact, which was spun off from GE in 2005 and gets more than a third of its revenue from the former parent, to widen its customer base.
Fairfax, Virginia-based Headstrong counts nine out of the world's top 10 investment banks and three of the top five asset managers as its clients, the company's website showed.
HEADSTRONG TO BOOST GROWTH
Genpact, which in February forecast disappointing 2011 revenue growth of 10-13 percent, now expects to ride on the 20 percent-plus growth rate of Headstrong, which reported 2010 revenue of about $217 million.
"Being able to increase our onshore presence is something we look for and it gets us closer to customers," Bhasin said.
Headstrong, founded in 1981, has most of its delivery centres in the United States and focuses on financial services, helps clients manage customer relationships and business processes like help desks.
"This cross-pollination closes deals faster, expands deal sizes and creates a strong profitable niche," Chowdhry said.
Datamonitor's Black Book of Outsourcing gave Headstrong the top slot in financial markets IT outsourcing in its 2009 report.
Genpact will fund the deal, expected to close by May 31, with cash and borrowings of $350 million under its new credit facilities, it said in a regulatory filing.
The company had cash and cash equivalents of $404 million at the end of 2010, and sees the deal adding to 2011 profit.
Genpact, which competes mainly with smaller companies like WNS Holdings Ltd and ExlService Holdings Inc , still has a long way to go to catch up with industry heavyweights Tata Consultancy Services , Infosys Technologies and Wipro .
Citigroup Global Markets Inc and UBS Securities acted as the financial advisers to Genpact for this deal and Cravath, Swaine & Moore was outside legal counsel.
Shares of Genpact, which have shed nearly a fifth of their value over the last six months, were trading up 5 percent at $15.56 on Wednesday on the New York Stock Exchange. (Reporting by Supantha Mukherjee and Saqib Iqbal Ahmed; Additional reporting by Sayantani Ghosh in Bangalore and Sumeet Chatterjee in Mumbai; Editing by Vyas Mohan And Joyjeet Das)