Mphasis on detail: How Blackstone brought the spunk back in Indian IT firm

Three years ago when private equity behemoth Blackstone Group acquired Information Technology  services firm Mphasis, it got attention because it was the largest investment it had made in the country, at a sticker price of $1 billion. Since then, the share price has consistently stayed in a range that is double of the price it was bought, even reaching a high of Rs 1,250 during summer last year.

Revenue growth has been the highest ever at 22 per cent, operating margins improved by over 3 per cent, and the company’s cash flow of $138 million has been at the top compared to the last five years.There’s been a business shift with 100 per cent development and outsourcing cut back to 21 per cent. 

Now, 61 per cent of its business is coming from services transformation (services that automate tasks and overhaul latent technology for the future) and the rest from App services, Go-To-Market and solution partnerships.

Geographically, 91 per cent of business once came from America and the rest from Europe and other markets. All the other markets account for over 30 per cent of its business now. 

Did Blackstone find a missing formula, or had Mphasis’s former owner missed targets? Jerry Rao, the man who founded Mphasis, says, “When large multinationals make acquisitions across the world, there’s a tendency to drift and not pay attention, as opposed to by a focused hungry investor like Blackstone which leads to value generation that should have happened earlier.”

In 2008, EDS, which had bought a majority stake in the company, sold itself and Mphasis to Hewlett Packard (HP) for almost $14 billion. HP ran it as an independent listed subsidiary in India. Under EDS, analysts say that Mphasis was run efficiently with clients like JPMorgan and Charles Schwab. Once it was sold to HP, that focus shifted. For starters, there was a sense that the company had been overpaid for, so that created its own pressures. Then, Mphasis saw three CEOs come and go in 18 months. By 2012, HP’s own performance was lagging and that constituted a problem for a partner that got more than 50 per cent of business from it. In a report at that time, Japanese analyst Nomura wrote: “We see HP’s depressed outlook for enterprises services businesses as a sign that Mphasis’ problems with its largest client are likely to worsen.” 

Before it acquired Mphasis, Blackstone has been tracking the firm for over three years, and was impressed by its customer base, deep intellectual property in digital services, and strong free cash flow generation. “Before it went up for sale, sufficient value had eroded for multiple reasons leading to a good bottom fishing opportunity for Blackstone,” said an analyst who declined to be named.

Blackstone did two strategic things before its entry. First, it secured a long-term contract with Mphasis' largest customer Hewlett Packard Enterprises (HPE) with a minimum revenue guarantee. “Blackstone understood that some 90 per cent of the target's revenue was in foreign currency while costs were largely in Indian rupees which gave it an inherent hedge against currency depreciation,” says Amit Dixit, senior managing and head of private equity, Blackstone India. In addition, Blackstone had also invested in IT firm Intelenet earlier, which had added over 11 Blackstone portfolio companies as customers, and it knew that was something that could also be done for Mphasis. Intelenet eventually represented a 4x exit for Blackstone which sold it for a billion dollars in 2018. Dixit added that in export sectors, such as IT, Blackstone’s 90-plus global portfolio companies could be potential customers for service providers. 

The other signature Blackstone touch which relates to 'business building' and not just throwing money at companies involved bringing in “a great team on Day One.” 

Mphasis's present CEO Nitin Rakesh had a clear charter from his board when he was brought in a quarter after the buyout. Also, a seasoned network of industry experts and business leaders that included Dave Johnson (ex-IBM), Amit Dalmia (ex-HUL), Marshall Lux (senior advisor at BCG, ex-McKinsey) and Paul Upchurch (ex-Accenture, Nielsen) were put on the board.

Mphasis had marquee clients, strong positioning and depth of talent and therefore was expected to jump on the growth bandwagon. “My priority was to protect the core business and focus on accelerating growth pivoted around client transformation,” says Rakesh. That happened in the financial year 2018 when the company crossed the billion-dollar revenue mark and its market cap grew by 2.5 X.  What spurred it?  When Blackstone took over, it set up upon a distinct sales channel that focused on Blackstone portfolio companies that Mphasis could do business with.