Can Blackstone help Mphasis realise its potential?

Nearly a year after being shopped around by its parent Hewlett-Packard Enterprise, Mphasis has finally found a buyer. It was announced on Monday that PE fund Blackstone Group would acquire 84 per cent of the 60.5 per cent stake that HPE had in Mphasis.

Blackstone thus valued the company between $825 million and $1.1 billion. The valuation at just about the same as its revenue is seen as being at the lower end of the spectrum. This acquisition by Blackstone is the latest twist in the long-running Mphasis story. But before we proceed further, a quick recap of how Mphasis became a part of HPE.

Mphasis can trace its roots to one of India's earliest IT services companies, BFL Software floated by the Bangurs of Kolkata. Jerry Rao (the nephew of N.R. Narayana Murthy, the co-founder of Infosys and the man who brought Citibank to India) and Jeroen Tas had sought up a IT services company in the US in 1998, which acquired BFL Software in 2000 and thus the current company Mphasis came into being.

After showing much promise but failing to scale to become a Tier I player, in June 2006, Jerry Rao exited the company when he sold a majority stake to Electronic Data Systems (EDS) - an outsourcing pioneer based in the US started by billionaire Ross Perot. In 2008, HP, which was following in the footsteps of IBM to strengthen its higher margin service business and to balance its low-margin hardware business, brought EDS for a whopping $13.9 billion. Mphasis, which had always operated as an independent unit within EDS too, continued to be listed on the Indian bourses.  

HP acquired EDS just when the global economic winter was setting in. It struggled at first to integrate EDS. To blunt the edge of Indian IT companies, which had a cost advantage in the IT services business, HP started providing its internal IT service requirements to Mphasis. At one point of time Mphasis almost became a captive of HP, though it started gradually reducing its dependence on HP for its business. As HP increasingly started realising that Mphasis didn't have scale globally to compete with other Indian IT vendors, it wanted to focus on the high-end consulting business of EDS.

Also HP itself globally was facing many challenges and in the past year, split itself into two companies. One was the legacy business of PCs and printers, with the other being HP Enterprise, which focused on opportunities offered by large companies in the software and services business. So, Mphasis clearly did not fit into the long-term roadmap that HPE had and thus the shopping around of the company.

Apart from the likes of PEs like TPG, Bain and Apollo Global, companies like Tech Mahindra also were initially rumoured to be in the running for acquiring the company. If one had held onto Mphasis shares in the last five years, they would have actually lost money (excluding dividends) and including dividends they would have got a return less than a bank's fixed deposit rate. In short, Mphasis has been badly run and it has been slow to adapt to technological shifts in the company.

In FY 2015 on revenue of Rs 5,992 crore, Mphasis earned a net profit of Rs 674 crore. Blackstone clearly has a challenge on its hand. To sweeten the deal, HPE has thrown in a five-year masterservice agreement. Shorn of jargon, it means HPE assures Mphasis business worth $990 million over the next five years, though the pricing and other details have not been spelt out.

Mphasis has quietly been reducing its headcount. After the initial settling process and completion of an open offer, which is mandatory according to SEBI guidelines, Blackstone may decide to overhaul the management of the company as well as reduce headcount further. Away from public gaze and the demands of reporting its numbers every quarter, Blackstone may help Mphasis finally realise its potential. Several long-suffering public shareholders may decide that this is a good opportunity to exit what has been a disappointing performance over the last five years.