The Hindu Business Line : Hughes Software: Reject

SHAREHOLDERS of Hughes Software Systems can ignore the open offer being made by News Corporation (along with persons acting in concert) for a 20 per cent equity stake at Rs 232 per share.

The open offer was triggered by the decision of General Motors to split Hughes Electronics Corporation (the indirect parent of Hughes Software) and sell off its interest to Rupert Murdoch owned News Corporation.

Following this indirect acquisition of Hughes Software's parent, News Corporation is making an open offer for a 20 per cent equity stake in the former.

The offer may be rejected by the shareholders for two reasons:

One, the global telecom environment on which Hughes Software's fortunes are predicated have shown signs of recovery in the past six months.

Despite these signals remaining hazy, the fundamentals of Hughes Software rest on a relatively sound footing. Announcing the performance for 2002-03, the company management had provided guidance for 2003-04 of:

Sales growth of 35-40 per cent over the previous year;

Profit after tax growth of 40-45 per cent over the previous year.

However, in the next few months in mid-July, the company revised its earlier management guidance to:

Sales growth of 55-60 per cent;

Profit after tax growth of 60-70 per cent.

Given the latest outsourcing deal of $ 30 million struck with Lucent Technologies, revival of existing client relationships with Cisco and Alcatel and expansion/widening of relationships with Nokia, NEC and Johnson Controls, this management guidance seems achievable.

The combination of these factors have lent predictability and greater near term stability to the revenue and earnings stream.

The good performance in the first quarter and robust guidance for the second quarter of 2003-04 only strengthen the credibility of the guidance offered by the company.

Hughes has also explored the inorganic route through its acquisition of the Bangalore based Tenet Technologies for a consideration of Rs 18 crore.

Two, the current market price of Rs 353 is far higher of the offer price of Rs 232 and that makes the open offer unattractive.

The offer opened on August 20 and closes on September 18.

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