The Hindu Business Line : Mphasis BFL: Reject

MphasiS BFL shareholders can avoid tendering to the voluntary conditional open offer being made by TH Holdings, Mauritius, along with Electronic Data Systems (EDS). The offer is conditional on EDS acquiring a 51.72 per cent equity stake in MphasiS at Rs 204.50 per share.

Rationale

Our `avoid' call on the stock is based on two key elements. One, the success of this offer hinges largely on the investment action by institutional investors. Barings India Investments and Mr Jerry Rao together hold about 39 per cent equity in MphasiS (as of March 31, 2005).

Since these two investors are sitting on attractive gains, there is a good chance that they will tender to the open offer. That leaves about 12 per cent to be mopped up from other investors. Considering that the FIIs and mutual funds hold about 45 per cent of the outstanding equity, even if they tender a part of their holdings, the offer can sail through.

Strategic to EDS

Two, since this offer is strategic to EDS, as it is playing catch-up with its two key multinational peers — IBM and Accenture — on offshore headcount.

If this offer succeeds, the entry of EDS is likely to open up substantial opportunities for MphasiS BFL in the BPO space, enhance cross-selling potential in IT services and help protect its existing clients (see Investment World dated April 9). MphasiS shareholders may stand to gain if they hold on to the stock with a medium-term perspective.

The key risk for shareholders is the possible failure of the offer. If EDS does not succeed in mopping up 52 per cent equity stake and rejects the offer, there could be a 10-20 per cent downside to the stock price, linked to the acquisition-related premium built up in the run-up to the EDS offer.

Citigroup Global Markets is the manager to the offer. The offer opened on May 17 and closes on June 5.

Krishnan Thiagarajan

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