MphasiS : Unfair deal to minority shareholders? - Views on News from Equitymaster

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MphasiS : Unfair deal to minority shareholders?

Mar 8, 2011

The share price of MphasiS corrected by almost 28%, on 25th Feb 2011. That was the day the Bangalore-based IT company announced its Q1FY11 financial results, ended 31st Jan 2011. MphasiS had a poor show on numbers in Q1FY11. On Q-o-Q basis, both topline and bottomline declined by 8.5% and 20% respectively. As per the company’s management this sequential revenue decline in Q1 was 3.5% due to fewer working days in the quarter, 3% due to a milestone-related payment in its previous quarter, 1% because of currency fluctuation, and only 1% due to the pricing reduction. Hence the revenue drop has very little to do with the price reduction.

Source: CMIE Database

Now one may wonder if the performance was bad enough for investors to take the stock to the cleaners. There was not one but loads of reasons for this including issues relating to corporate governance!

Business related: In the eyes of investors, this poor show was not going to be a one-off case. Hewlett-Packard (HP) holds 61% stake in Mphasis and close to 71% of the company’s revenue comes from the parent channel. MphasiS had given extra discounts on HP Channel business. So investors thought that this kind of discounts would be there in the future as well on the back of HP’s dominant position in the client profile. Also there was a very little visibility on the growth in non- HP business.

Accounting related: Poor disclosures and non-reporting of segment profits by earlier segment definitions (Application, Infrastructure outsourcing and BPO ) were also discouraging. Instead segment reporting by verticals like banking, insurance, emerging industries etc were presented. So it was not possible to analyze the results in sufficient depth. The company had also stopped reporting other details like revenues by geographies and billing rates. These factors are very important for analysis of companies from the IT sector .

Governance related: Mphasis did not disclose the one-off revenues and provision reversals through fiscal 2010. That led to rosy, but wrong projections for the company by the analysts’ community. So MphasiS failed to meet expectations not only on the business front but also on governance issues.

On 4th March 2011, bowing to the pressure, MphasiS published extra disclosures. The company also announced that it would continue to publish more information over the subsequent quarters.

The biggest question still prevails!

Will MphasiS or rather MphasiS’s minority shareholders be treated fairly by HP?

MphasiS is sitting on the cash reserves of US$ 390 m. There is a fear in the market that HP will use MphasiS as a vehicle for acquisitions and capacity expansions abroad at the expense of MphasiS's minority shareholders. Also HP’s interests as a customer will continue to hold precedence over its interests as a shareholder in MphasiS.

Some analysts claim HP is deliberately eroding shareholder’s value at MphasiS. It is misusing its position as the dominant shareholder and largest customer by driving down prices offered to MphasiS. The intension of doing all this is to buy out minority shareholders cheaply.

These concerns over the treatment of minority shareholders by HP, is not totally baseless. HP had in the past not treated its minority shareholders very well in the case of Digital Globalsoft, a listed entity that was bought over by HP.

In 2003 HP wanted to buy out minority shareholders of Digital Globalsoft, a subsidiary of HP. About six months before announcing the open offer, HP had announced a scheme to merge its captive software services business called HP-ISO (India Software Operations) with that of Digital. The merger ratio was blatantly in favour of HP-ISO. And share price of Digital Globalsoft crashed 26% in a single day. This instance seems to be fresh in the investors' memory till date.

Is it just a deja Vu? Only time will answer this question.

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6 Responses to "MphasiS : Unfair deal to minority shareholders?"

aman

Mar 11, 2011

only SEBI can stop this kind of problem arising from insufficient disclosures....there must be penalty on the wrong doers......other minority shareholder will never get the real benefit for the kind of time and risk they have put during investment

Like 

procon financial and investment pvt ltd

Mar 10, 2011

It seems the mnc is not having regard to moral and ethical issues and taking for ride minority shareholders disregarding the fact that regulatory authoriy may take appropriate action . The corporate governance is deplorable and now any other co can site this example to treat unfairly its minority shareholders. We are holding 5000shares and lost all hopes

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kalpana

Mar 10, 2011

article seems to make right conclusion... after this article i too have gone thru many other documents and seems one shud get out of this stock...atleast there is no place for long term investors.....thanks for putting the right perspective ...

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aakash singh

Mar 9, 2011

rightly pointed that being MNC does nt mean nything.....now SEBI shud make some tough rules on buyback and take consent of minority shareholders ....so that parents company cant misuse their dminant position....

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SYJ

Mar 9, 2011

Mphasis has shown that just being MNC does not mean good governance and high corporate values. The market players must be congratulated for punishing the stock in the market for such misdeeds. I hope SEBI also intervenes in the interst of minority shareholders and take tough measures notwithstanding the size and clout of HP.

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vivek

Mar 8, 2011

very nice article....minority shareholder shud alwz wary of these kind of intentions....one shud alwz questions the corporate governance like in this case investors did....we minority shareholder shud alwz unite against these kind of malacious mentality....

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