Mphasis Ltd’s shares rose 3.18% on Tuesday, on news that the race for buying Hewlett-Packard Co.’s (HP’s) 60.5% stake in the company is hotting up.

The Times of India said on Monday that Tech Mahindra Ltd is leading the race and is contemplating an offer that is at a 20% premium to the recent market price of Mphasis.

It’s true that a 20% premium to the current market price will be an aggressive offer. But it’s a bit premature for minority shareholders of Mphasis to get excited.

This is because any decent offer will be possible only if HP sweetens the deal for the acquirer.

As things stand, about a fourth of the company’s revenue comes via HP, and it is declining at a fast pace. In the December quarter, revenue from the HP channel fell by almost 12% quarter-on-quarter.

Five years ago, this business had an annual revenue run rate of $700 million; it has now fallen to around $220 million, based on the December quarter revenue.

At this rate, the business will soon disappear. It doesn’t make sense for any acquirer to pay a premium, unless HP provides some surety for providing business to Mphasis for at least three-five years.

This may well be in HP’s interest as well, as a decent- enough premium will help HP garner nearly $1 billion from the sale.

But, of course, this can’t be taken for granted. HP also has a wholly-owned subsidiary in India, which appears to have been a larger beneficiary of its offshoring efforts in recent years.

As far as Tech Mahindra’s interest in the company goes, Mphasis, with its large exposure to the banking and financial services sector, will be a good fit. This is a segment where Tech Mahindra has lagged behind peers, and the acquisition will increase its scale in the business to a respectable $1 billion.

But having said that, the risk of paying too much and merger integration issues are areas of concern.

Analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd say in an 8 February note, “One of the key things a buyer would look at when considering MPHL is the margin that it makes in the Direct Channel versus HP channel... Based on our calculation, direct channel Ebit (earnings before interest and tax) margins could be around 11% (nearly half of the HP Channel Ebit margins of around 20%)."

In most of the recent deals in the IT (information technology) services space, the target companies have had margins of around 20% and their portfolios have been far more diversified. As such, there’s hardly any reason for paying a high premium for Mphasis over comparable deals such as iGate Corp.’s acquisition of Patni Computer Systems Ltd.

It seems the only way HP can extract good value is to commit to certain revenues via the HP channel for the next few years. Unless this happens, minority shareholders of Mphasis, who are hoping for a decent exit, will be disappointed.

The writer does not own shares in the above-mentioned companies.