Offshore Captives Not out for Count, with Banks' Need for Control


The current awful economy is sending a lot of conventional business and financial wisdom flying right out the window.


Back in October, some folks were predicting that the sinking economy would lead U.S. banks to sell their captive offshore facilities in India, leading me to write a post called Will India See a Sell-Off of Its Captives? The banks would make some needed cash by unloading non-core assets and probably be able to negotiate sweet deals with acquirers, which were likely to be Indian outsourcing specialists looking to grow their business. All of those factors were cited when Tata Consultancy Services agreed to pay $505 million in cash for Citigroup's captive operation.


Whoa, not so fast. Captives are valuable for banks, which are subject to a long laundry list of regulations, because of the added control they offer. That's always been a big deal to banks, but is even more so now following the revelations of widespread fraud at Indian outsourcing giant Satyam earlier this year. And guess what, boys and girls? Banks are likely to find themselves subject to even more regulation once the dust from the current financial implosion has cleared.


Not only that, but the economy is prompting a flurry of acquisitions and mergers, which means banks will have a lot of integration work on their hands. It's going to cost a lot and be complicated to boot, leading a Gartner analyst to write a blog post titled "The Looming Faiilure of post-Merger Integration." Banks have a history of botching it even in flush financial times, writes IT Business Edge blogger Loraine Lawson. Think much due diligence is being done in quickie deals such as Bank of America's $50 billion, all-stock offer to buy Merrill Lynch? Me neither.


So, does this sound like the kind of touchy task that a traditionally risk-averse sector like banking (at least it was until it went collectively crazy buying and selling sub-prime mortages) wants to entrust to outside companies? Not really, which is probably why it's mentioned in a recent BusinessWeek article predicting increased interest in offshore captives.