Blackstone emerges as strongest contender to acquire Mphasis from Hewlett Packard Enterprise

MUMBAI | BENGALURU: Blackstone has emerged the strongest contender to acquire IT services firm Mphasis from Hewlett Packard Enterprise in a deal that could be worth over $1 billion, said three people aware of the matter.

Buyout funds Blackstone and Apollo Global Management submitted binding offers last week for the 60.4% stake after the third serious contender, Tech Mahindra, opted out. The difference between the two offers was close and Blackstone is said to have then raised its bid to edge past Apollo in the battle between two private equity heavyweights, said the people cited above.

Blackstone is backing the current management led by Chief Executive Ganesh Ayyar. The fund has already tied up financing from Deutsche Bank, Standard Chartered and ING.

“They have made an aggressive offer. Within the next 10-15 days, HPE is expected to finalise and get back,” said an executive directly involved, on condition of anonymity. Blackstone is the world’s largest PE fund with $311 billion under management. Based on a market value of Rs 9,779.76 crore for Mphasis, HPE’s stake is valued at Rs 5,906.9 crore. Mphasis, which rose 1.7% to Rs 465.30 at close on Wednesday on the Bombay Stock Exchange, has gained 20.33% over the past year.



Analysts said Blackstone’s offer may include a control premium of 10-12%. The stock had hit a 52-week high of Rs 534 a share on October 29, 2015, in anticipation of an imminent sale. “FY17 could be a year of revenue growth, aided by low HPE contribution and growth in direct international business,” wrote Govind Agarwal, technology analyst at brokerage house Prabhudas Lilladher, last month.

When contacted, spokespersons for Blackstone, Hewlett Packard Enterprise (HPE) and Mphasis declined to comment. ET was the first to report on February 4 that Blackstone and Apollo were competing with Tech Mahindra for Mphasis. On March 10, ET reported on the two funds closing in on the company.

BLACKSTONE LOGS ON TO TECH
Experts see ample room to turn around operations given that the banking, financial services and insurance (BFSI) segment contributes 65% of revenue, along with the company’s digital focus. Also, revenue is at $1 billion, a key threshold in the space.

Acquiring Mphasis will help Blackstone augment the capabilities of other portfolio companies and leverage on scale. In the recent past, when most other sectors have slashed IT spending, BFSI clients have floated large transformational deals. There has also been an acceleration of mergers & acquisitions in recent months in the sector. Virtusa just bought Polaris, which like Mphasis has a strong focus on the BFSI sector. “We have seen various sub-sectors increasing IT spend and the momentum is back,” said Sanjeev Krishnan, partner, PwC India.

Blackstone, keen on big deals in Indian IT services, has a strong operational team by virtue of its recent buyback of outsourcing company Intelenet for $385 million, four years after selling the unit. That had been its first exit in India, six years after entering the country. Last December, it acquired a minority stake in technology company IBS Software, which specialises in travel, transportation and logistics software, by buying out General Atlantic and some other shareholders for $170 million.

If the acquisition of Mphasis takes place, this would be Blackstone’s third Indian tech investment within a year and its boldest bet in the country till date. The group has hired David Johnson, who headed M&A at Dell as well as IBM, to lead its technology investments and strategies worldwide.

“Blackstone has a strong technology lead. Sometimes, they back the existing management and on some other occasions, they will have an independent team for operations,” said a senior PE executive.

MPHASIS RIPE TAKEOVER CANDIDATE
As with several of its mid-tier peers, Mphasis has always been a ripe takeover candidate. The current sale process was revived by the US technology giant late last year, with an official mandate given to Citigroup to manage a formal sale process as HPE has been trying to revamp its IT services group. HPE’s contribution to Mphasis’ revenue has been declining.

HP had tried to exit the company two years ago as well, but the process was stalled largely on account of lack of clarity regarding its commitment to the business going forward. Jerry Rao, a former Citibank executive, founded Mphasis in 2000.