PeopleSupport Going Public   TheDeal.com Newsteam | TheDeal.com [The Deal llc] | POSTED: 05.11.04 @15:17 PeopleSupport Inc., a provider of offshore call center services in the Philippines backed by some of California's leading venture capital firms and technology companies, announced plans Monday, May 10, for an $86.3 million initial public offering. SG Cowen & Co. LLC and Piper Jaffray & Co. will underwrite the offering, which was filed with the U.S. Securities and Exchange Commission. The company did not say how many shares it will issue and at what price. Los Angeles-based PeopleSupport gets funding from Rustic Canyon Ventures in Los Angeles, Meritech Capital Partners in Palo Alto, Calif., Clearstone Venture Partners in Santa Monica, Calif., Octane Capital Management LLC in Mountain View, Calif., Accel Partners in Palo Alto and Benchmark Capital in Menlo Park, Calif. Other investors in the company include technology giants Hewlett-Packard Co. in Palo Alto, Novell Inc. of Waltham, Mass., and Siebel Systems Inc. of San Mateo, Calif. PeopleSupport and its VCs would not comment on the IPO or its past funding history, citing quiet period restrictions. According to a source, the company raised $75 million between 1998 and 2000. Martin Wolf, president of information technology mergers-and-acquisitions advisory firm Martin Wolf Securities, said he wasn't surprised an outsourcing firm was going public and expects to see more offerings going forward. "It's the hottest space in the IT services area and it's just getting started," he said. Wolf, who has worked with a number of outsourcing firms in India, said gross margins for outsourcing companies are roughly 10% to 12% higher than traditional IT services companies, while profitability is five times as great. Market research firm Gartner Inc. estimates that worldwide spending of business process outsourcing services is expected to surpass $3 billion this year and grow to $24 billion by 2007. Tom Taulli, co-founder of Newport Beach, Calif.-based CurrentOfferings.com, said he expects the PeopleSupport IPO to attract investor interest because outsourcing is a hot area. But he noted that the offering is not being taken public by top-tier underwriters, which could limit institutional investor participation. "It's not to say it's a bad offering," he explained. "It's just a smaller company that would not attract a tier-one underwriter. For an investor who wants to take a flyer on a hot-button trend this is an interesting company." Founded in 1998, PeopleSupport got its start offering U.S.-based call center services, but joined the trend of going offshore a few years later. It serves 29 U.S.-based clients in many industries, including travel and hospitality, retail and financial services. The bulk of its revenues, about 88% in 2003, however, came from three large clients: Expedia Inc. of Bellevue, Wash.; Network Solutions of Herndon, Va.; and EarthLink inc. of Atlanta. PeopleSupport provides round-the-clock Internet services to its clients, including e-mail, online chat and international and regional long-distance telephone services. The company maintains dedicated fiber-optic networks for use in its business, and employs 2,474 people, most of them in the Philippines. The company has seen an explosive growth since 2000, when it posted a net loss of $46 million on sales of about $11 million. In 2003, the first year PeopleSupport was profitable, it reported a net income of $8 million on sales of $30 million. The company also has roughly $12 million in cash. In going public, PeopleSupport could also be signaling that it's a possible takeover target. After all, consolidation in the outsourcing sector is also ramping up. New York-based Citigroup Inc., the world's largest financial services company, on April 12 said it would acquire the 55.62% in equity it does not already own in e-Serve International Ltd., a Mumbai, India-based software and transactions processing company, for $125.4 million. That acquisition came five days after IBM Corp. said it would acquire New Delhi-headquartered call center company Daksh e-Services Pvt. Ltd. for a reported $170 million. India and to a lesser extent the Philippines are among the preferred locations for the back-office operations of the world's large companies. Building on their proven software skills and low-cost, English-speaking labor, global and local businesses alike are establishing facilities to offer information technology services, help-desk support and transactions processing - all delivered remotely through increasingly cheaper, high-speed telecom links. The Philippines has the third-largest English-speaking population in the world - after India and the U.S. - and many who speak fluent English with minimal accents, the company said in its filing. "Through our operations in the Philippines, we provide significant value to our clients by offering services at a substantially lower cost than U.S. outsourcing centers," PeopleSupport said in its filing. In its filing, PeopleSupport said it would use the net proceeds from the offering to finance estimated costs of $6.4 million for leasehold improvements, telecommunications equipment and furniture and fixtures for a new facility in Manila in 2005. In addition, the new funding will be deployed to expand the capacity of its current operations by establishing new outsourcing centers in the Philippines or elsewhere, and pursue possible acquisitions of complementary businesses, technologies or products. Providing legal advice on the IPO for PeopleSupport are attorneys Jorge del Calvo, Ethan Feffer and Albert Asatoorian of Pillsbury Winthrop LLP in Los Angeles. Mark Stegemoeller and Edward Sonnenschein Jr. of Latham & Watkins LLP of Los Angeles are advising the underwriters. PeopleSupport expects to list its share on the Nasdaq market under the ticker symbol "PSPT."