MUMBAI (TIP): Hewlett Packard (HP) has formally started work to sell IT services firm MphasiS Ltd with Citigroup managing the process, said people directly briefed on the matter. HP’s move is said to attract the interest of buyout private equity funds like TPG Capital, Carlyle Group and Advent, they added. The PC maker owns 60% stake in Bangalore-based MphasiS, which is worth $900 million at current market value.
HP would expect a premium to the prevailing price, pushing the deal value to over $1 billion, said sources cited earlier. Citigroup has been selected to run the sale process after HP had direct talks with a few private equity firms in recent months to ascertain their interest. TOI on March 25 reported that buyout funds have held conversations with MphasiS management after sniffing a deal. The management led by CEO Ganesh Ayyar would work with the successful acquirer.
Private equity biggies like TPG and Advent are hungry for a large play in India’s off-shoring story, but have not clinched too many deals except for Apax Partners backing iGate’s Phaneesh Murthy to snap up Patni Computer Systems. A spokesperson for HP declined to comment, when contacted. Citigroup also declined to comment. Former Citibanker Jerry Rao founded MphasiS 15 years ago, which became part of HP after the latter’s $14 billion buyout of Electronic Data Systems (EDS) in 2008.
HP wrote off $16 billion relating to its recent acquisitions, including EDS, last year. HP’s falling business to MphasiS and a lack of visibility on future contracts were concerns in a deal making, said a private equity executive on condition of anonymity. The fact that HP, which is faced with declining global revenues, has a competing technology services arm of its own complicated the matter, he added. But, bankers familiar with the process said HP would extend an assured long-term business contract to a potential buyer.
“A multi-year contract will be offered though it’s not mentioned upfront right now,” added this source, who did not wish to be named. MphasiS shares closed marginally down at Rs 369 in a buoyant Mumbai market on Thursday, pegging the market capitalization at Rs 7,770 crore ($1.5 billion). MphasiS, battling declining orders from the parent, has seen share price slump 40% in the last two years. An analyst with a foreign brokerage, who tracks MphasiS, said a non-HP investor would be a big positive since the parent’s persisting global woes were the biggest overhang for the stock. MphasiS will see HP revenue drop below 50% of the turnover by April this year, down from 70% in October 2010.
The company has chased non- HP revenues in banking, capital markets and insurance verticals, besides pushing inorganic growth to offset the drop in business from the parent. It acquired Digital Risk in US , a mortgage services firm for $200 million last year and insurance solution provider, Wyde Corp, in the US, for $30 million in August 2011. Earlier, it had acquired AIG’s captive software unit in India, to boost insurance business.
MphasiS has about $384 million left in cash, after paying for recent acquisitions, and is seen adding $30-50 million every quarter. While free cash on books could comfort any buyer, one of the suitors said the company would need to spend big bucks to build marketing muscle to develop non-HP revenue. “That’s going to a pain point for any acquirer and MphasiS,” the source added.