Indian PE hopeful of another whopper exit

EDS announces offer for Mphasis, an Indian technology company and gives Barings Private Equity an avenue for exit.
America's EDS, USA confirmed its intent on April 4 to acquire Mphasis for a consideration of $380 million. Mphasis is an Indian technology sector company. Analysts who cover EDS were generally positive on the move and the EDS stock price moved up on the announcement. It is speculated that Barings Private Equity Partners (India) which owns 34.9% of Mphasis will tender its shares in the offer. However, the acquisition price, which is at a discount to the current market price, underscored the challenges faced by private equity firms operating in India in the current stock market rally.

EDS has made a conditional offer to acquire 52% of Mphasis at Rs204.5 ($4.58) per share. The price represented a 5% discount to MondayÆs closing price of Rs215.8 but a 30% premium to the 26-week average. The tender offer will be open between May 22 and June 12, with April 25 set as the date for receiving any competitive bids. As per SEBI laws EDS can change the offer price until June 1. Mphasis founder and CEO, Jerry Rao who quit Citibank after a 25 year career in 1998 to fulfil his entrepreneurial ambitions is said to be key to EDSÆ interest. It is rumoured that Rao will move to EDS as head of global financial services practice, an area in which EDS is competing head on with IBM and Accenture.

Speculation about this deal has abounded since January and has sent the share price - which had already moved up considerably in the current bullish environment - soaring. Mphasis shares gained 17% in the week of March 10 moving from Rs180 to Rs209. The irony of the current situation is that EDS will not go ahead unless it gets 52% suggesting some investors will have to sell below market price.

As per the mandatory filing with the Bombay Stock Exchange, as at the end of 2005, only 8.41% of the free float is with the Indian public and another 1.73% with NRIs. A company called Mphasis HoldingsÆ owns 4.62% and Jerry Rao himself owns 3.98%, down from 5.3% in the previous quarter - suggesting he may have sold shares in the market during the quarter. Institutional investors, including Fidelity and Templeton, hold the biggest chunk of Mphasis stock at 42%. Participation by some of these investors in the offer will be critical to the EDS takeover.

After an Mphasis board meeting on Tuesday, Jerry Rao announced the support of the management for the EDS bid. This suggests that both his stake and the Mphasis Holdings stake could also be on offer taking the percentage EDS can be confident of to 43%.

Barings started investing in India in 1997 and this was one of the firmÆs early investments. It is speculated that Barings initial investment was $10 million. Barings tried to exit this investment in May last year and was in discussions with a number of financial and strategic investors.

Mphasis, with its offshore delivery capability, as well as its expertise in the banking and financial services industry (including a number of blue chip clients such as Citibank, Standard Chartered, ICICI and others) and presence in developed markets (US, Europe, Japan), was identified as a potential fit for EDS as far back as 2002. Since then it has significantly grown its business through a combination of organic growth and acquisitions. Mphasis set up a BPO business, MSource that offers contact centre services out of Bangalore and Pune in English and also in Tijuana, Mexico in Spanish. Mphasis has about 12,000 employees of which 11,000 are based in India. In 2005 it acquired El Dorado Computing, a healthcare insurance software solution company. Speculation about the future of the firm as a stand-alone entity has been rife for some time. Mphasis had already grown through a merger with BFL Software, which was driven by private equity firm BaringsÆ stake in both. However, another merger-of-equals seemed a sub-optimal solution.

The EDS acquisition is yet another in a line up of transaction IndiaÆs information technology (IT) and information technology enabled services (ITES) sectors have witnessed in this decade starting with WiproÆs acquisition of Spectramind which gave ChrysCapital an estimated sixfold return. Since then Asia Private Equity Review estimates there have been 57 exits and private equity has been handsomely rewarded. Some of the larger transactions include the sale of Daksh in which Actis and General Atlantic Partners sold a stake to IBM, the sale by GE Capital of its outsourcing arm GECIS to General Atlantic Partners and Oak Hill Capital partners and the sale by Citigroup of i-FLEX to Oracle.
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