The Hindu Business Line : The crucial 9 pc

The success of the conditional offer made by EDS to acquire a 52 per cent equity stake in Mphasis BFL will boil down to the tendering of 9 per cent stakeby the institutional/retail shareholders in the ensuing open offer. The latter together hold 52 per cent in Mphasis BFL.

The magical figure of `9 per cent' to reach EDS's target of 52 per cent control assumes significance as Barings India Investments, Mphasis Holdings and Mr Jaithirth Rao (shares held in his personal capacity) together hold 43.5 per cent of Mphasis BFL's equity as of December 31, 2005. These entities may be favourably disposed to the open offer as Barings has been in the exit mode for the last one year.

The 9 per cent required may appear small, but the Oracle experience with i-flex Solutions should put this figure in perspective. Oracle could manage no more than 0.7 per cent in its open offer for acquiring a 20 per cent stake from i-flex shareholders after it acquired Citigroup's 41 per cent stake in the company. Learning from the Oracle experience, EDS has made a conditional open offer, reserving the right to reject the shares tendered if it fails to mop up 52 per cent.

Barings'perception

It may be recalled that Barings India Investments had voluntarily put its 36 per cent equity stake on the block in May 2005. While Hinduja TMT and Temasek had emerged as front-runners to buy out this stake, the deal apparently fell through on `pricing issues' and clarity on the role of senior management team at MphasiS.

These reasons, however, were not spelt out publicly by either Barings or MphasiS. Barings then decided to stay invested in the company in August last.

Going by the reported pricing trends in the earlier bid ranging from Rs 280-310 (or Rs 140-155, adjusted for bonus), the latest offer price of Rs 204.5 works out to a 30-45 per cent premium.

Since MphasiS is one of the key investments left in the Barings Portfolio Fund - I, it may find this offer quite attractive at this point. For its 34.5 per cent equity, Barings is expected to derive a consideration of $ 250 million (Rs 1,125 crore). It had made an original investment of $ 16.5 million eight years ago.

MphasiSs Holdings and Mr Jerry Rao, who hold 4.62 per cent and 3.98 per cent equity respectively may also be open to tendering their stake in the offer.

Institutional investors

Since most institutional investors are sitting on attractive returns of over 50 per cent, their tendering to the open offer will depend on two factors.

One, their take on the synergies and improvements in financials that will accrue under the new EDS management. And how much of that `value for control' is already factored in the offer price of Rs 204.50?

Two, their call on how quickly will EDS act on taking MphasiS private.

If EDS is not comfortable in keeping MphasiS as a listed outfit, it will have to come out with a reverse book-built offer to buy out the remaining shareholding, akin to the Flextronics-Hughes Software offer last year.

Related Stories:
EDS makes open offer for MphasiS

More Stories on : Outsourcing | Mergers & Acquisitions | Open Offers

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