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