Hewlett Packard [HP] has formally started work to sell IT services
firm Mphasis Ltd with Citigroup managing the process, said people to directly
briefed on the matter. HP’s move is said attract the interest of buyout private
equity funds like TPG Capital, Carlyle Group and Advent and so on. The PC maker
owns 60% in Bangalore based Mphasis, which is worth $900 million at current
market value. HP would expect a premium to the prevailing price, pushing the
deal value to over $1 billion.
A spokesperson for HP declined to comment about Citigroup’s
selection to run the sales process. Citigroup also declined to comment. Former
Citibanker Jerry Rao founded Mphasis 15 years ago which became part of HP after
the latter’s $14 billion buyout of Electronic Data Systems (EDS) in 2008. HP
wrote off $16 billion relating to its recent acquisitions, including EDS last
year. HP’s falling business to Mphasis and a lack of visibility on future contracts
were concerns in a deal making, said a private equity executive on condition of
anonymity. The fact that HP, which is faced with declining global revenues, has
a competing technology services arm of its own complicated the matter, he
added.
But, bankers familiar with the process said HP would extend
and assured long term business contract to a potential buyer. “A multiyear
contract will be offered though it’s not mentioned upfront right now,” added
this source, who did not wish to be named. Mphasis shared close marginally down
at Rs369 in a buoyant Mumbai market on Thursday, pegging the market
capitalization at Rs 7,770 crore ($1.5 billion). Mphasis, battling declining orders
from the parent, has seen share price slump 40% in the last two year. An analyst
with a foreign brokerage, who tracks Mphasis, said a non HP investor would be a
big positive since a parent’s persisting global woes were the biggest overhang
for the stock.
Mphasis will see HP revenue drop below 50% of the turnover
by April this year, down from 70% in October 2010. The company has chased
non-HP revenues in Banking; capital markets are insurance verticals, besides
pushing in inorganic growth to offset the drop in business from the parent. It acquired Florida-based digital risk, a
mortgage services firm from $200 million last year and insurance solution
provider, wyde Crop also in the U.S, for $30 million in august 2011. Earlier it
had acquired AIG’s captive software unit in India, to bolster insurance
business, Mphasis has about $384 million left in cash, after paying for recent
acquisitions, and is seen adding $30-50 million every quarter. While the free
cash on books could comfort any buyer, one of the suitors said the company
would need to spend big bucks to build marketing muscle to develop non-HP
revenue going forward. That’s going to a point for any acquirer and Mphasis,
the source added.