A Wind In My Sale

The Bollywood potboiler finds an echo in corporate India.
The brio is back and the patient is alive and well, when his sweetheart finally
finds him. MphasiS chairman, Jaitirth (Jerry) Rao would agree that both EDS and
his company needed each other rather equally badly.

Texas-based Electronic Data Systems's (EDS) acquisition
of a 52% (83 mn shares) stake worth $380 mn in Bangalore-based MphasiS was an
offer pending since last year. The offer price of Rs 204.50 (about $4.58) was a
clear index of investor disapproval of the deal, and EDS has not revised its
offer price since. EDS's clarity of purpose, notwithstanding the fact that the
deal is unlikely to meet a competitive bid at the last minute, is mainly the
result of the world's second largest IT services company consistently losing
ground to rival MNCs-IBM Global Services (IGSI), HP, and Accenture in the
Indian market down the years

With Jerry Rao, Mphasis biggest brand ambassador, poised to
head the global financial services practice of EDS, the latter has made a big
step towards addressing its financial services ramp-up in India to take on IGSI.

MphasiS has focussed on the booming financial and
healthcare sectors by providing a range of IT and business services, including
application maintenance and development, transaction processing, and customer
relationship management, but never really succeeded in consolidating on its
gains and claiming a global foothold, which an alignment with EDS brand can now
remedy.

Inorganically Speaking...

Baring India investment, which has for long been trying to offload its 34.9%
stake in MphasiS, must be as relieved with the deal as is the 'momentum'-focussed
MphasiS shareholder. EDS has been planning the stake offer since the second half
of 2005, after Barings and MphasiS holdings reduced their stakes in the
October-December quarter from 35.1% and 8.42%, respectively.

The Bangalore acquisition by EDS could be the appropriate spark to reignite interest in offshore acquisitions in India

The Bangalore acquisition by EDS could be the appropriate
spark to reignite interest in offshore acquisitions in India. The US and UK
companies have been hiring skilled IT consultants and associates in high-growth
areas such as telecom, banking, and insurance. Often, the pressure on
conventional organic growth options are accompanied by MNC budgets being
stretched on real estate prices, leasing costs, higher S&G expensing in
comparison with most Indian services companies, and the cost of retaining their
key talent.

Just the way it makes sense for a Tier 1 or Tier 2 Indian
IT company to grow organically by acquiring key clients through foreign
acquisitions of smaller competitors, the MNCs are matching steps with their
Indian counterparts right on home turf.

Consolidation as a factor of greater leverage in the Indian
market for MNCs is also fuelled by the continuous average margin pressures
upward of 4% facing all Tier 2 and Tier 3 companies right through fiscal 2006.
Smaller indigenous companies continue to be quick growth panaceas for MNC
players. This phenomenon will see M&A activity accelerate in fiscal 2007 as
overseas companies vote with their hammers.

The days of 'momentum shareholders' are clearly gone
and only serious investors reap long-term bang for their bucks; here, EDS has a
clear understanding of the MphasiS business, earning potential, and cash-flow.

The Cheer Factor

The open offer will be contingent upon EDS acquiring the 83 mn shares (52%),
out of an estimated 160 mn shares outstanding. The 52% buy can give EDS a clear
lead over prospective wooers such as Temasek, Capgemini, Carlyle, and Hinduja
TMT for the shareholdings of Barings and Mphasis Holdings. While EDS posted
revenues of $5.2 bn as of February this year, its net income was just $112 mn.
The market capitalization of MphasiS has been roughly $3.5 bn over the past
year, and could be a strong cheer factor for EDS in going ahead with the buyout.
Notwithstanding the stock market's panic reaction, the offer price was at a
30% premium to MphasiS's average share price over the past six months.

Besides the emphasis on financial services where EDS has
struggled to gain traction against IBM and Accenture worldwide, the Texan giant
has been keen to grow in primary applications development and management, where
MphasiS has a strong presence across geographies.

EDS, on its part, has not been blind to customer sentiments
towards offshoring to cut costs and realize innovation value out of India. The
questions of headcount and scale parities against competitors such as IBM,
Accenture, Capgemini, and HP would work in EDS's favour if the acquisition
target was just right. Where offshore capacity upgradation goes for EDS, MphasiS
turned out to be the perfect fit. Two IS indeed company. In the case of MphasiS,
it will most certainly be known by the company it keeps. Again, Jerry couldn't
have asked for more even if his shareholders did.

Ravi Menon

ravim@cybermedia.co.in