HP’s MPHASIS to Blackstone’s MPHASIS – What’s Next?

DEAL

Mphasis had acquired USA based Digital Risk LLC in 2013. Digital Risk is one of the largest independent providers of Risk, Compliance and Transaction Management solutions to the United States mortgage market. The acquisition was an all-cash deal valued at USD$ 175 million (about Rs 960 crore) with an additional earn-out component of US$ 27 million, making the total consideration of USD$ 202 million. The transaction was signed by HP in calendar year 2013. The acquisition by HP was strategic in nature as mature services was captive consumption for HP. In this article, we have tried to cover the deal impact on Mphasis revenue and performance (Our earlier article in Jan 2013 edition).

The deal was closed by the HP in tranches earn out component to be paid in18 months for the date of signing of agreement. Since the performance in revenue of the company was significantly impact post signing the earn out payment was reduced by approx. 50%.

The acquisition by Mphasis was through its indirect subsidiary Mphasis Wyde Inc based in Delaware, USA. Mphasis Wyde Inc acquired 100% stake in Digital Risk LLC, with Digital Risk operated its business through various subsidiaries as follows:

1. Digital Risk Mortgage Services, LLC
2. Digital Risk Compliance Services, LLC
3. Digital Risk Analytics, LLC.
4. Investor Services, LLC
5. Digital Risk Valuation Services, LLC
6. Digital Risk Europe, OOD
7. Digital Risk Mortgage Services

However, Mphasis was later acquired by Blackstone from HP in September 2016.  Blackstone India entered into a definitive agreement with HP to buy a majority stake in Mphasis. HP owns 60.4% of Mphasis. Blackstone paid INR 430/- per share to HP. Since Mphasis being a listed on BSE and NSE exchanges it made on open offer public shareholders at Rs. Rs. 458/- per share. But there was no major response to the open offer. So, the Blackstone ultimate stake post-acquisition was 60.46%. HP also agreement with Mphasis at time of sale to Blackstone that minimum services contract to be outsource to Mphasis.

FINANCIAL

In terms of financial performance for Digital Risk there is no much progress. Revenue growth of consolidated of business of Digital Risk LLC post signing of agreement by Mphasis is as follows:

Table 1: All Figs in Rs. mn

Please note that immediately after signing of agreement there is impact on revenue heavily but the margin has shown improvement. It seems that the new management take time to accommodate with the culture of the company so therefore there first focus is profit improvement and then revenue growth in next years. So there is no much growth in revenue with this deal at the Digital Risk LLC level except for benefits that might have created by the management at holding company level.

Balance Sheet

Table 2: All Figs in Rs. mn

Please Note: It seems from equity that Mphasis has issued funds post-acquisition

BENEFITS OF THE SHAREHOLDERS

Post-acquisition by Blackstone the benefits to shareholders was in form of buyback and higher dividend. The fund distributed to the promoters pursuant to buy back and dividend post-acquisition is as follows:

Table 3: Benefits

Please note: Buy Back by Mphasis was in March 2017 @ Rs. 635/- per share and dividend declared post acquisition was in October 2016 and March 2017. Therefore, it seems that Blackstone strategy has been return of investment on continues basis.

MARKET PRICE MOVEMENT

The price movement from the date of acquisition of Mphasis of Digital Risk LLC

CONCLUSION

The acquisition by Mphasis of Digital Risk LLC was at a time when HP was promotor. So it was strategic and there on acquisition of Mphasis by Blackstone as Financial Investors. It seems HP could not create value and soon after existed.  It seems HP decision to acquire the Digital group probably did not get as envisaged. Blackstone created value for all the shareholders in terms of liberal dividend pay-outs and refund by way of buyback, though as perceived it never opted for delisting.