At a reported deal size of $15.5 million, it?s not really a big ticket acquisition. After all, MphasiS?s profits for 2009-10 will be close to Rs 1,100 crore. But the buyout of Fortify Infrastructure Services, a provider of offshore based remote IT operations & management (ROM) services, by MphasiS should help it strengthen its existing portfolio. At a price of $15.5 million, the Rs 4,264 crore MphasiS has paid around 0.8 times the current revenues of Fortify, of approximately $20 million. And there are earn-outs in two tranches at the end of March 2011 and March 2012.

The good news is that Fortify operates in the high-growth areas of business support, package implementation, IT outsourcing (ITO) and BPO. The bad news is that although a profitable company at the operating level, Fortify has been hurt by investments made to create more offshore capabilities. But with this acquisition, MphasiS, which provides IT solutions, services and BPO, will be less dependent on Hewlett Packard (HP)?especially in the ITO space, by about 10%, says Enam Research.

Fortify?s capability in remote management services is not only an advantage for MphasiS because it can help the firm target mid-market segment, it also gives MphasiS access to marquee clients. ?Fortify?s platform-based RMS offerings would raise the contribution of outcome based pricing for MphasiS. Fortify has about 25 clients, with the top five clients contributing about 50% of the revenues,? says Enam Research. Being a part of the world?s largest technology company, HP might have added to MphasiS?s? client base and also assured MphasiS of more projects. But diversification is always welcome. MphasiS CEO, Ganesh Ayyar, who joined the company from HP in January 2009, has focused on developing the non-HP practice, which currently contributes about 30% of the company?s revenues. ?HP provides end-to-end services to its clients and though we play a role in providing those services, we could miss out on opportunities in the mid-market where the demand for pure play offshore providers is picking up,? he observes.

MphasiS says it is targeting the offshore market for ROM which is about $4 billion. ?Globally the ROM market is about $12 billion which includes end-to-end work for big clients as well. With Fortify we are primarily targeting the offshore business of ROM with mid-market segment, which is about $4 billion and is expected to grow 30% CAGR in the next three years,? points out Ayyar. Fortify would add 300 people to MphasiS? existing team, who would focus on ROM services. This workforce would eventually be raised because MphasiS is looking not only at providing traditional infrastructure services, but also bringing in additional capabilities linked to performance. According to Ayyar, the demand for pure play offshore providers is picking up within the mid-marker segment since contract sizes are smaller. ?These contracts could be in the range of $ 3-5 billion and this is the space were other Indian players are also doing some work,? he explains.

Currently, about 72% of MphasiS? revenues flow in from HP (60% as a partner and 12% as client) and 30% from direct clients. EDS, the erstwhile parent of MphasiS, was acquired by HP in 2008. A majority of the revenues that MphasiS earns from HP comes from the enterprise services business or the erstwhile EDS. The enterprise services business constitutes only a percentage of HP?s $114 billion revenues, giving MphasiS sufficient headroom for further growth. Currently, MphasiS has three lines of business from HP?work that it does for HP?s internal IT, work on projects from HP?s clients as a sub-contractor and work that both HP and MphasiS have obtained through joint go-to-market strategies. Of the three, the second line comprises the largest chunk.

MphasiS plans to look at a string of acquisitions ?This one is just the beginning, there are others are in pipeline,? confirms Ayyar. The firm?s cash position had rose to $200 million at 2009 end from about $10 million at the end of 2008. The acquisitions are going to be funded with cash in hand. Ayyar has been talking about a gameplan which would focus on direct clients. ?We have been working with a set of direct clients for a long time and want to add to this list. Yet, there are markets that HP may not be addressing and we would want to capture those,? he says. That?s a safe enough strategy.