Blackstone buys Mphasis in $1.1 bn deal

By: | Updated: April 5, 2016 8:27 AM

Blackstone, the global private equity giant on Monday, announced that it would be buying Mphasis, the Bengaluru-headquartered IT services player owned by Hewlett Packard Enterprise (HPE) in a deal valued at around $1.1 billion.

Mphasis will be included in HPE’s preferred provider programme opening up additional revenue opportunities.Mphasis will be included in HPE’s preferred provider programme opening up additional revenue opportunities.

Blackstone, the global private equity giant on Monday, announced that it would be buying Mphasis, the Bengaluru-headquartered IT services player owned by Hewlett Packard Enterprise (HPE) in a deal valued at around $1.1 billion. The deal will not mark any change in management at Mphasis, as Blackstone will continue the operations with the existing team.

The deal, which is one of the largest for any PE player in the Indian IT industry, marks Blackstone’s entry into an expanded play with technology companies, while also lending a great degree of stability for Mphasis. However, this deal is unlikely to be a sign of consolidation in the Indian IT industry that is dominated by a few multibillion-dollar players with the majority of them being in the mid-tier space of below $500 million in revenue, industry observers said.

According to Mphasis CEO Ganesh Ayyar, Mphasis is now in the “line of light” of HPE’s business. Typically, Mphasis used to derive more than 60% of its revenue from HP, even as it tried to win new accounts to diversify the portfolio of clients. HPE’s business for Mphasis had been declining for the last two years as the company had consciously decided to garner a higher percentage of non-HPE revenues. With this deal, Mphasis will also get greater access to the IT budgets of Blackstone’s global portfolio of more than 80 companies. Prior to the deal, parent company HPE held a 60.5% stake in Mphasis.

blackstone

Under the deal, Blackstone will pay a purchase price of R430 per share to HPE and will follow it up with an open offer for the purchase of an additional 26% shares of the company to be priced at R457.50 apiece. Based on the open offer subscription, the purchase price consideration will vary between R5,466 crore and R7,071 crore (approximately $825 million-1.1 billion).

Adding a sweetener to this deal is the master services agreement (MSA) reached between HPE and Blackstone, whereby the former has committed a minimum revenue amount to Mphasis escalating year over year and totalling $990 million over the next five years. Also, Mphasis will be included in HPE’s preferred provider programme opening up additional revenue opportunities.

The duration of the MSA will have three automatic renewals of two years each effectively taking the entire duration to 11 years.

Amit Dixit, senior managing director and co-head of private equity in India at Blackstone, said the IT sector has delivered very strong returns for them and expects stability, predictability and growth from the Mphasis deal. The other two investments in the IT sector by the PE player have been that of acquiring a majority stake in Intelenet and a minority holding in software product company IBS Software.

Mphasis came into HP’s fold following the latter’s global acquisition of EDS. The company had been marked as a takeover target for quite sometime now as it was not seen being aligned with HP’s global strategy.

Commenting on the deal, Sid Pai, lead consultant, Tekinroads, a technology consultant company, told FE, “Mphasis was acquired by HP as a vestigial asset and never really was integrated. This is a better situation now as there is a true investor in the form of Blackstone.”

There are a lot of positives for Blackstone from this deal as there is a good annuity business from Mphasis with steady number of clients and a global presence. However, Pradeep Mukherji, partner at technology advisory firm Avasant, said it is difficult to pinpoint the actual reason for the Blackstone buy. He said it was not clear whether it was looking for a valuation play or at a long-term merger with other technology companies in its portfolio.

According to Pai, mergers and acquisitions by Indian IT companies have largely been to beef up capability and not so much of size, adding, “Real consolidation will happen only when the big players merge.”

Mphasis’ last 12 months’ revenue as of December 31 was `59,99.6 crore ($904 million) and profit after tax was `6,92.3 crore ($104 million). It has deep vertical expertise in the banking, financial services and insurance (BFSI) sector and portfolio focus on new-generation services including digital solutions. Mphasis serves customers across the globe including six top global banks, 11 out of 15 top mortgage lenders, and three top global insurance companies. The company has some 24,000 employees across 16 countries.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition