MphasiS welcomes EDS bid but stock slips

By Shailendra Bhatnagar

NEW DELHI - The board of MphasiS BFL Ltd. on Tuesday backed a $380-million bid by Electronic Data Systems Corp. for a majority stake, but the Indian firm's stock fell on investor disappointment at the offer price.

Shares in the Bangalore-based computer services provider have risen steadily since January, when a newspaper report said U.S.-based EDS was looking to acquire a big stake.

On Monday, EDS said it wanted to buy 83 million shares, or 52 percent of the company, at 204.5 rupees each.

The offer price was a 5.2 percent discount to Monday's closing price of 215.8 rupees but a 30 percent premium to the shares' 26-week average.

"We are very supportive of this transaction and look forward to its successful closure," MphasiS Chairman Jerry Rao said in a statement.

MphasiS shares gained as much as 6 percent in early trading but quickly fell and closed 1.8 percent lower at 211.9 rupees. The main Sensex stock index closed up 0.64 percent.

"The offer is unattractive because it is below the market price. Investors would do better to wait and see if it is revised upwards," said Vinod Bansal, director at V.N. Capital Ltd.

BUYOUT TREND

EDS set an April 25 deadline for any competitive bids and said in a newspaper advertisement that it retained the right to revise the offer price or the number of shares until June 1.

The proposed buyout follows similar deals in which global firms have purchased majority stakes in Indian IT providers.

In August, Oracle Corp. bought 41 percent of banking software firm I-Flex Solutions Ltd. for 800 rupees a share from Citigroup, and then made an offer of 882.62 rupees per share to other investors for another 20 per cent.

But that revised price was still lower than the market price of I-Flex at the time. It now trades at 1,407.30 rupees.

Analysts said more such deals could be in the offing for mid-sized Indian technology firms, facing growth pangs and intense pressure from larger rivals such as Tata Consultancy Services and Wipro Ltd.

"This deal could trigger similar buyouts, especially in the unlisted space," said Jigar Shah, director at K R Choksey Shares & Securities.

Shah said the proposed deal would help Texas-based EDS add muscle and raise headcount in India, where many global firms such as International Business Machines Corp. either outsource technology work or have their own development centres.

"The competitive position for EDS would improve and it would be able to take larger orders from the global outsourcing market," Shah said.

MphasiS provides software development, builds and manages computer systems, runs call centres and provides other services such as processing of paperwork for foreign firms.

It has about 12,000 employees, of whom 11,000 are in India, compared with more than 35,000 on the payroll of top software services exporter TCS.

GROWING COMPETITION

Acquiring MphasiS would help EDS boost its Indian headcount to 14,000 from 3,000, but it would still lag far behind bluechip IBM, which employs 38,500 workers in India.

Both companies are expanding their presence in Asia's third-largest economy to take advantage of a large pool of highly skilled technical workers who are paid far lower wages than their counterparts in western economies.

Leading Indian software exporters are also bidding for multi-year, multi-million dollar deals as they provide longer-term stability to revenue.

But smaller firms are unable to bag big contracts as they lack muscle, affecting valuations, analysts say.

"The price that a potential buyer is willing to pay has reduced over a period of time, very clearly showing that valuation of such firms is reducing because of competition," said Arun Kejriwal, strategist at research firm KRIS.

Baring Private Equity Partners (India) Ltd., which holds 35 percent of MphasiS, is likely to sell the stake to EDS in the open tender, a source familiar with the deal said.

But it was uncertain whether EDS would get the desired stake because its offer was below the market price, the source said.

The offer, managed by Citigroup, will be open between May 22 and June 12.

(Additional reporting by Rosemary Arackaparambil and M.C. Govardhana Rangan in Mumbai)