On April 4, EDS, the Plano, Texas-based second largest it services company in the world (after IBM) announced it was making an offer for a 52 per cent share of Mphasis Technologies at Rs 204.5 per share, valuing the whole company at approximately $730-million (Rs 3,285-crore). The offer did not come as a surprise to market watchers and analysts. Baring Private Equity Partners (India), which holds a 35.63 per cent stake in Mphasis, had been looking to exit its investment for quite some time and a couple of deals in the past had fallen through on the question of valuation.

Meanwhile, Mphasis traversed the journey from being hailed as the next big thing in Indian it to an also-ran tier-II player. It had tried to purchase growth by acquiring Kshema Technologies for $21 million (Rs 94.5 crore) in 2004, a healthcare firm El Dorado for $16.5 million (Rs 74.25 crore) and the UK-based Princeton Consulting for $14 million (Rs 63 crore). It even acquired a small Chinese company Navion in 2002, to kick-start growth. However, execution became a critical issue. Many from the top management, including CFO Ravi Ramu, had recently quit the company. Mphasis was also unique in the sense that a third of its revenues comes from BPO work compared to just around 5 per cent for larger Indian it companies like Infosys and Wipro.

For the year ended March 31, 2006, Mphasis had increased its income by 23 per cent to Rs 940.11 crore and net profit by 20 per cent to touch Rs 150 crore against the same period of the previous year. While the numbers look impressive, tier-I players like TCS, Wipro, Infosys and Cognizant have taken an unassailable lead over it with a couple of billion dollar revenues. Thus to leapfrog to that size and scale, Mphasis had to be acquired.

For EDS, which has a 3,000-member operation in India, it was a good chance to scale up its presence in a low-cost location. Travis Jacobsen, spokesperson for EDS, admits as much when speaking to Business Today: "Have we been slow in recognising India's potential? No. But could we have scaled up here much faster? Yes. This offer certainly presents us a good opportunity to ramp up our presence in a low-cost, high-talent destination."

EDS has to get its act in India together pretty fast. Its major rivals like IBM and Accenture already have 40,000 and 17,300 employees in India, respectively. Even internationally, EDS has just 16,000 employees representing 12 per cent of its total workforce in low-cost destinations like India, Australia, Eastern Europe, South and Latin America. A smooth acquisition is critical to EDS as it will give it a credible offshore, low-cost destination presence. It will also give it a large foothold in the BPO segment.

There are, however, a few hiccups before the final word on this can be said. While the Mphasis board has recommended the offer to shareholders, it is not clear what the medium term plans of the existing management are. Chairman Jerry Rao in his individual capacity holds around 8.42 per cent of the company. When queried whether Mphasis would retain its identity and independent management control, all Jacobsen says is, "Only when the acquisition goes through will we have any comments." Rao himself would only comment that the "management is supportive of this transaction and looks forward to its successful closure. The offer has both a strategic and cultural fit".

However, given that the offer price is lower than the prevailing market price, a revision in the offer cannot be ruled out. Jacobsen says the offer price represents a 30 per cent premium to the previous 26-week average price. The last word has not yet been said on this deal. Keep watching this space.