The Hindu Business Line : Trigger a chain reaction

Or at least raise the competitive bar in ways hardly conceivable even a few weeks ago. The deal we are talking about is the equity stake sale of 36 per cent in MphasiS BFL, put on the bidding block in early May by Barings Private Equity, the largest shareholder. Since then, the markets have been agog with speculation about the nature of bidders.

The bidding process is currently on and has not finalised any successful buyer at the time of going to print. The bidding appears to have thrown up three categories of players. The first category is the Indian frontline software companies such as Tata Consultancy Services and Wipro (at least one of these companies was said to be at an advanced stage of negotiations with MphasiS for a possible buyout even earlier this year).

The second set is said to be the global multinational (MNC) vendors of the likes of IBM Global, EDS, Cap Gemini and Atos Origin, which are seeking to expand their India presence for offshoring aggressively.

The final class of interested buyers is private equity firms such as Blackstone group, Temasek or Warburg Pincus, which already have an established presence through investments in Indian outfits.

This stake sale by Barings assumes great significance as the successful buyer through an open offer of 20 per cent additional equity may be able to acquire a controlling stake of over 51 per cent in MphasiS BFL.

The company will be in the driver's seat, dictating policy decisions and management control over the entire venture. Assuming, among the three, the first two scenarios play out, the implications could be (the buyout by private equity firms may have the least impact):

Indian IT companies emerge successful: It appears that only frontline companies such as TCS or Wipro may be in the fray, as the consideration for the buyout in the range of $250 million may be beyond the reach of most mid-tier companies.

Second, frontline companies may be in a better position to capitalise on the synergies that may accrue from this deal. TCS, aspiring to get a foothold in the burgeoning BPO space, may find MsourcE, MphasiS's BPO arm, quite attractive. In addition, its presence in the financial services space, accounting for 61 per cent of revenues, will complement TCS's strength in the area.

For Wipro, this deal will strengthen their presence in the BPO space and fall in line with the integrated IT services-cum-BPO model that they are working on, post Spectramind integration. In addition, it will impart added muscle to Wipro in the embedded space, in which it is already an established player.

If we work on this assumption, competitive pressures will force other frontline players also to act on acquisition or other strategic deals faster than one expects. It is significant to note that this deal will give the successful bidder control over revenues of Rs 765 crore in 2004-05, growing at 25-30 per cent and with four acquisitions (Kshema Technologies, Onida Infotech, Princeton Consulting and Eldorado Computing) under its belt over the past year.

The combined employee strength of MphasiS (BPO - 5634 and IT Services - 2741) at 8375 will be fairly large by any yardstick.

Following this deal, both the profile and size of acquisitions may undergo a qualitative change and some domestic or overseas mid-sized companies may be pursued more aggressively than in the past. Though integration will pose a huge risk and challenge for any company gaining control over MphasiS, it will be watched closely.

Global MNCs make the grade: If IBM Global succeeds in this exercise, it is bound to raise the competitive bar for all the Indian companies, given that its employee strength in India has already crossed 25,000.

Moreover, since IBM already has Daksh within its fold, its ability to leverage MsourcE may be fairly strong.

Similarly, for companies such as Cap Gemini or Atos Origin, this deal will provide the right scale and size to leapfrog in the Indian turf. For EDS too, this deal can turn out to be crucial to establish a foothold in the Indian market.

Clearly, between both Global MNC and Indian vendors, the nature of acquisitions will go beyond the kind that we witnessed in the last two years. Small or tuck-in acquisitions of the kind aimed at adding expertise (say, in enterprise solutions) or entry into new verticals (say, telecom or retail) and customer base will happen, but `scale differential' will force them to scout for larger acquisitions. And for that matter, if the deal turns out to be priced attractively, promoters of other mid-sized companies, which are struggling to establish a differentiated model or reluctant to sell-out in the past, may begin to consider the exit option.

Picture by A. Roy Chowdhury

maverick@thehindu.co.in

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