The decision of Hewlett-Packard Co. to acquire Electronic Data Systems Corp.(EDS) would stir a sense of déjà vu for the Indian markets. In September 2001, the company had agreed to buy Compaq Computer Corp., which held a majority stake in Digital Globalsoft Ltd, a listed Indian software services firm. Digital Globalsoft’s shares then traded at about Rs450. In a little over two years, Hewlett-Packard agreed to buy out minority shareholders of the Indian company at Rs850 per share. The National Stock Exchange’s CNX IT index had risen by a much lower 35% during the same period.
Investors in Mphasis Ltd, in which EDS holds a majority stake, seem to be hoping for an encore. The company’s shares rose about 10% on the expectations of an open offer from Hewlett-Packard after it takes over control of EDS.
According to the Securities and Exchange Board of India’s takeover regulations, an acquirer must make an open offer for at least 20% of the target company’s share capital in case there is a change in management control. EDS holds a 60.9% stake in Mphasis and so the takeover code should get triggered. Also, considering that Hewlett-Packard prefers wholly owned subsidiaries, it’s likely that it may make an offer to buy out all minority shareholders, like it did with Digital Globalsoft. But if the deal is structured as a merger of the two companies, an open offer may be avoided.
Also, if delisting Mphasis shares is not on the agenda, it’s unlikely that the offer price would be higher than the average price in the last six months. According to the takeover code, the open offer price should be the higher of the acquisition price and the average price in the last six months. Mphasis accounts for only about 2% of EDS’ revenues, and it will be difficult to determine how much it contributed to the total consideration Hewlett-Packard agreed to pay.
Investors must also note the bitter experience Digital Globalsoft’s minority shareholders faced mid-2003, about six months before the open offer for minority shareholders was made. Hewlett-Packard decided to merge its own Indian software services business with that of Digital Globalsoft, at a valuation most analysts thought favoured the parent company. Digital’s shares had fallen by as much as 26% in a single-day’s session as a result.
While that story ended well for Digital Globalsoft’s minority shareholders, the ride was bumpy. Mphasis shareholders may do well to keep the experience of Digital Globalsoft shareholders in mind before getting too exuberant about the deal.
No slowdown in employee costs for most pvt banks
Banks have been under pressure in fiscal 2008. Credit growth slowed and margins were squeezed. There are no signs of a slowdown in employee compensation, however. For the eight private sector banks that have declared their results so far, employee expenses rose by a massive 47.1% last fiscal year, the same rate of growth as in fiscal 2007. As a percentage of total income, though, employee expenses rose slightly to 7.57%, implying that growth in interest and fee income had largely offset the rise in wages and salaries.
A completely different picture is seen from the results of the public sector banks. In FY08, the rise in employee costs (in a sample of 22 banks that have declared their results) has been a very low, 0.97%. That’s probably because the headcount in these banks is coming down, thanks to employees retiring. In FY07, the growth in employee compensation for these banks had been just 1.7%. The contrast couldn’t have been more glaring—on the one hand you have a clutch of fast-growing banks with no legacy of over-manning and on the other you have relatively slow-growing banks with more manpower than they need.
It’s probable, however, that the trends will change this year, with ICICI Bank Ltd announcing lower intake and fewer promotions. On the other hand, the State Bank of India management says that it will recruit in large numbers this year.
One last point—the fourth quarter results for the 22 public sector banks show that their cumulative employee expense was 19.5% lower than in the year-ago period. That’s because most banks have provided for the AS-15 employee-benefit requirements from their reserves, while writing back provisions made during the earlier three quarters of the year. These write-backs have lowered employee compensation during the last quarter and boosted the net profit. But it’s a cushion that won’t be available this year.
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