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EDS buy gives HP services, India edge

EDS buy gives HP services, India edge

Bangalore: Hewlett-Packard Co.’s acquisition of EDS will create the second largest multinational IT firm in India in terms of employees, and level the playing field some between the firm and its competitor and the largest multinational IT firm here, International Business Machines Corp., or IBM, as the two fight for business within the country and elsewhere.

Mint's National Editor (Corporate) Josey Puliyenthuruthel on the HP-EDS deald4798078-20ff-11dd-9711-000b5dabf613.flvMint’s National Editor (Corporate) Josey Puliyenthuruthel on the HP-EDS dealCompanies such as IBM and Accenture Ltd have built a significant presence in India to combat the low-cost delivery model Indian firms such as Tata Consultancy Services Ltd, Wipro Ltd, and Infosys Technologies Ltd have perfected.

“It’s a landscape-changing deal, a kind of which one hasn’t seen for a long time," said Phil Codling, principal analyst, IT services practice at the London-based research agency Ovum, in a telephonic chat with Mint after the HP-EDS deal was announced.

“In an industry where we’ve become accustomed to IBM holding a significant global lead over the rest of the competition, the merger would thus bridge this gap substantially and establish the merged entity as the clear No. 2 in IT services," Codling added.

IBM has around 73,000 employees in India. Accenture has around 37,000. Salaries in India are one-fourth those in the US, and expertise of the kind these firms want is also more freely available here. Accenture chairman William Green said recently that the firm would add 13,000 more employees in India in the current year.

HP has a total workforce of 31,000 in India, including around 1,000 in the sales and marketing team of its hardware business; the rest includes people in service lines such as application development, back-office management and infrastructure services, according to an executive at HP’s local operation who did not wish to be identified.

HP doesn’t report India-specific numbers, but according to a recent issue of the Business Today magazine, the company has revenues of Rs12,250 crore here, largely from selling hardware. In terms of the larger services business, although HP has won several small IT outsourcing contracts from customers such as Bank of India and Bank of Baroda, it lags IBM which has won similar contracts from, among others, almost all of India’s top telcos, including Bharti Airtel.

EDS operates in India through its listed subsidiary Mphasis Ltd which has more than 28,000 employees in both IT and back-office services. Mphasis, 61% owned by EDS, serves customers such as State Bank of India and Vodafone.

Shares of Mphasis hit an intraday high of Rs256, before closing at Rs242.45, a 10% gain on the Bombay Stock Exchange, tracking the news of HP’s bid for EDS. The announcement of the acquisition itself came after trading hours. Institutional investors such as Barings India Investments Ltd, Aberdeen Asset Managers and HSBC Global Investment Funds own a little more than one-fifth of Mphasis, while individual shareholders own about 7.35%.

It wasn’t immediately clear whether the change of ownership of Mphasis (from EDS to HP) would trigger an open offer for its shares in keeping with Indian laws. Indian securities laws mandate that any transaction involving more than 15% of a company’s equity be followed by an open offer to shareholders to acquire a further 20% in the firm. But the rules are not clear on such offers when the takeover is of an overseas company, which has a publicly listed unit here.

In a recent instance, Heineken NV, which received ownership of a 37.5% stake in India’s United Breweries Ltd (UBL), as part of a three-way deal in January with Carlsberg A/S to buy brewer Scottish andNewscastle Plc., has not yet made an open offer for 20% of the Bangalore brewer’s shares.

In 2006, when Procter and Gamble India Holdings acquired a 41.02% stake held by US’ Gillette Co. in Gillette India Ltd, following a $57 billion (Rs2.25 trillion today) global deal a year earlier, it did not make an open offer for publicly listed shares of the Gillette unit, which was 12% owned by public shareholders and 20% by Indian partner Saroj Kumar Poddar, a Kolkata businessman.

Sabyasachi Satyaprasad, analyst with neoIT, an advisory firm, said the merger would significantly enhance HP’s capabilities in systems integration, global delivery and back- office competitiveness. “Further, the deal will drive HP to a services oriented environment from a product category," he said.

The deal will also accelerate the growth of the combined entity by bridging the gap with front-runner IBM in the estimated addressable IT services market of $500-550 billion, according to a presentation made by HP to its investors. IBM is growing at 10%, while the growth rate of the combined entity would be 7%, ahead of its other peers such as Fujitsu and Accenture. EDS was growing at 4%, while HP was growing at 3% in the IT services market.

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