With its Q2 results yesterday, SYNNEX, the parent company of Concentrix, announced its intention to acquire Convergys, the second largest CX services provider and a public company with ~$2.8bn annual revenues. SYNNEX will pay ~ $2.43bn (includes $26.50 per share and repayment of $315m net debt). The transaction is expected to close by the end of 2018.

The largest CX Services provider in North America

Convergys has ~115k employees in ~125 delivery centers in 30 countries. Its biggest market is North America, with 74% of its global revenues (~$2.07bn in 2017) coming from the U.S. Onshore in the U.S. it has ~20k employees in ~47 centers, supported by offshore centers in India, LATAM, the Philippines, and Southeast Asia. Convergys also has a sizable presence in Europe (onshore and nearshore).

The company has ~265 clients in the communications & media, high-tech, retail, BFSI, automotive, and healthcare sectors. Communications, which forms 43% of the business today, has been experiencing strong headwinds and volume fluctuations, with revenues steadily declining over the last three years. In Q1 this year, the revenue decline in Convergys’ largest client AT&T was ~$40m. Despite this dependence on a very soft sector, Convergys has been able to stabilize its operating margin (7.1% for 2017, down -30bps y/y) by rationalizing capacity in the U.S., adding new clients in Europe, and diversifying to other verticals.  Its retail segment in particular, including consumer goods and travel, has been successful, growing at 15% y/y in Q1 2018.

Convergys will bring in proprietary VOC analytics and reporting platforms, an RPA practice, and digital channel expertise.

Combined for scale

With the acquisition, the ~$2bn Concentrix will add ~$2.7bn in annual revenues and ~$380m of adjusted EBITDA in the first year, including cost synergies of $150m in 36 months. The combined company will have ~650 clients, ~225k employees in 40 countries (12 new geographies for Concentrix).

Concentrix’s last two acquisitions, the digital development and consulting company Tigerspike in 2017 and BPS provider Minacs in 2016, also added horizontal and vertical capabilities with analytics, development, consulting resources, and tools.

The biggest benefits for Concentrix with the new acquisition will be:

• A significant expansion in its delivery footprint, including in the challenging German market
• The addition of a multi-national client base to cross-sell and upsell digital capabilities in consulting, automation, mobile app development, and marketing optimization.

CX consolidation accelerates

This major deal comes two weeks after Teleperformance’s announcement of the Intelenet purchase and on the heels of this year’s StarTek-Aegis merger, Comdata’s M&A expansion in France, Webhelp’s shopping spree in Europe, and an overall trend of vertical and horizontal additions by CX services providers.

What is driving the consolidation at this pace is the high level of industry fragmentation (the leading three players have less than 10% market share) and the need to scale investments in new technology and value-add offerings. The major factors here are the competitive landscape and new CX client needs:

• Contact center services specialists are being challenged by multi-tower BPS pureplays and ITS/BPS players offering consulting and transformation services on top of technology expertise
• Clients are looking for a multinational standardized delivery with a healthy mix of onshore, nearshore, and offshore locations and local expertise for all major markets for truly global programs
• Clients require automation and advanced analytics to move performance beyond basic process optimization and continuous improvement. Targets such as cost savings and new revenue generation are mostly maximized with traditional outsourcing models
• The rapid technology cycles and emergence of new digital channels make clients’ investments in CX tools less sustainable. What vendors can offer is a CX and domain-specific guide to the selection and customization of these tools
• Last, but not least, the changing corporate strategies incorporating CX in a digital transformation journey, move clients towards providers who can help with the overall puzzle.

One more CX unicorn up for grabs

In 2019, the $4.7bn Concentrix will become the second largest CX services vendor globally, it will rank alongside the likes of big league BPS vendors ADP, BNY Mellon, Conduent, and Teleperformance, and at par with Arvato. For the latter, the planned sale of Arvato CRM Solutions by its owner Bertelsmann remains the last big opportunity this year to buy a sizable share of the CX market.