5 Keys To Synnex's Acquisition of Convergys

The Birth Of A New Business Process Outsourcing Behemoth

Synnex's $2.8 billion acquisition of call center operations leader Convergys represents a bold move by the distributor to dominate the BPO Market.

The deal brings Synnex an additional $2.7 billion in BPO sales, a global BPO footprint with 12 new countries, 6,000 services professionals and new customers in key vertical markets. Once the deal is completed, Synnex will have a global BPO footprint of 40 countries servicing clients in 70 different languages.

"With Convergys, Concentrix will have the geographic scale and expertise to fulfill all aspects of customer experience service needs, especially in high-value engagements," said Synnex CEO Dennis Polk said. "Equally impressive will be the combined customer list of the two organizations expanding a multitude of the Fortune 1000 today to the disruptors we'll see on this list in future years. We see many opportunities to sell deeper into the joint customer base."

The deal, which will be accretive after the first year, is expected to generate cost savings of up to $150 million over three years thanks to delivery center alignment, rationalization, third-party spending, increased leverage from its global infrastructure.

Breaking Out Beyond Distribution -- A Higher Margin Business

Synnex's $2.8 billion acquisition of Convergys gives the 38-year-old distributor the pole position in a higher-margin, customer service business.

Martin Wolf, president of martinwolf M&A Advisors of Walnut Creek, Calif., one of the top channel investment advisors, said the deal is a "brilliant" move by Synnex to break out beyond distribution.

"This changes and improves their business model," said Wolf. "The distribution business is at risk today. There is nothing negative for the channel here. This is a chance for Synnex to step up in class. It's a better business model. I expect them to be rewarded for it. The market sees the BPO market as a better business model. The value is higher for every revenue dollar and dollar of earnings in the BPO market. It's a more differentiated model."

The margins are much higher in the BPO because the business model is a higher recurring revenue business with more intellectual property, said Wolf.

The deal is yet another sign of the services economy that is reshaping all business, said Wolf. "We have gone from software-as-a-service to platform-as-a-service to device-as-a-service," he said. "The only thing left to convert is Chinese food as a service."

Synnex Concentrix Division Is Driving The New Combined BPO Business

The Convergys acquisition is actually being done by Synnex's Concentrix division, with Concentrix and Convergys expected to be integrated into a single business.

Concentrix is a wholly-owned subsidiary and top global provider of customer engagement CRM BPO services. It was formed after Synnex's 2006 acquisition of Connectrix, a global provider of call center, database analysis, and print-on-demand services.

Christopher Caldwell (pictured), Synnex executive vice president and president of Synnex's Concentrix business, said the deal provides a strong opportunity to drive growth by "cross-selling within our joint client base, leveraging the incredible talent pool, and being able to support many of our clients on a more robust geographical footprint."

The transaction will strengthen four of Synnex's strategic verticals including banking and financial services, healthcare, technology, and automotive, and will add to Synnex's list of Fortune 1000 clients in high-growth market disruptive companies, said Caldwell.

The Financial Details Of The Blockbuster Deal

Convergys said the deal is a cash and stock transaction with an enterprise value of approximately $2.8 billion, including approximately $170 million of Convergys outstanding net debt.

Under the terms of the agreement, Convergys shareholders will receive $13.25 per share in cash and 0.1193 shares of Synnex common stock for each Convergys common share.

Convergys said the $26.50 implied price of the deal represents an 18 percent premium to the closing stock price on May 10, 2018, the last trading day prior to a report regarding a possible Synnex acquisition of Convergys.

For Synnex the deal will be accretive after the first year and is expected to generate cost savings of up to $150 million over three years thanks to delivery center alignment, rationalization, third-party spending, increased leverage from its global infrastructure.

The financing of the deal will not impact day-to-day liquidity flexibility of Synnex, Polk said. He said the deal provides new business opportunities for both the distributor and the call center operator.

Convergys Had Hit A Rough Spot Before The Big Deal

Convergys' sales for 2017 were $2.79 billion -- a four percent drop from $2.9 billion in 2016.

For the current fiscal year, Convergys has predicted a constant currency revenue decline of up to seven percent as a result of significant volume fluctuations with the company's two largest clients.

Responding to an analyst question about Convergys' flat or falling revenue over the past three years, Christopher Caldwell, Synnex executive vice president and president of Synnex's Concentrix business, said that the decline in the business is related to Convergys' telco business segment, and was well-documented previously by Convergys.

"The Convergys team has done a very good job of growing other business. They just haven't been able to outrun some of the declines in telecom sector, and that's primarily focused around a large movement by two of their clients to move work offshore. [After the] due diligence process, we are very comfortable with the dynamic of the business where they are growing their market, the clients that they are attracting, and how we can continue to help that grow," he said.

Activist Investor Elliott Management Likes The Deal

Activist technology investor Elliott Management, which earlier this year disclosed that it owned a 4.9 percent stake in Convergys, likes the deal.

Jesse Cohn, the senior portfolio manager for Elliott Management, praised the deal in a statement sent to CRN.

"The Convergys Board has secured a strong outcome for shareholders, made possible by years of hard work from (former Convergys CEO) Andrea Ayers and her team," said Cohn, who has waged activist actions agains the likes of Citrix, Cognizant, and BMC Software. "The combination with Synnex will deliver significant accretion, cost benefits and strategic advantages that will create substantial shareholder value, and we thank the Boards of both companies for their efforts."

CRN named Cohn the number one disruptor in the industry in 2015 for his success in getting tech companies to make dramatic changes.

"Fear him or welcome him, but when Cohn knocks on your door get ready for the ride of your life," wrote CRN of Cohn in the Top 25 disruptor thumbnail.