News reports reveal that Wipro Ltd. has entered into a Memorandum of Understanding (MoU) to form a startup company, Alopa Networks, in the Silicon Valley, USA.
Wipro Ltd., is a part of Wipro Corporation and is engaged in the businesses of information technology (IT), financial services, healthcare systems, consumer lighting and hydraulic products. Its infotech division is the premier PC and peripherals supplier and the second largest software exporter in the country.
Wipro will hold 10-15% equity stake in Alopa. The equity investment will be in the form of intellectual property and will not involve any cash outflow. This is an attempt on the company's part to encourage entrepreneurial talent to create value for shareholders.
Wipro's equity stake in Alopa Networks is in line with its strategy to increase focus on Internet and e-commerce. Alopa will create solutions and services for high speed Internet access using digital subscriber lines.
Wipro has no experience in venture funding, and this is its first investment in a startup. Startups in Silicon Valley are launched by the minute. While some of them go on to become very successful companies (Netscape, Hotmail), quite a few fail and/or get taken over. If Alopa's products are successful, then Wipro's equity investment could appreciate considerably, when Alopa plans to go public. This may encourage cash rich Indian software companies to invest in startups (Indian as well as overseas), which will solve the problem of funding for many software companies, particularly in India.
However, if Alopa does not get a good response for its products, the value of Wipro's equity investments could fall considerably. Of course Wipro's loss would only be notional as its investments in Alopa do not involve any cash outflow.
Regardless of Alopa's success or failure, Wipro's association with an Internet startup in Silicon Valley will be a good learning experience for the company. Since Wipro plans to enter Internet and e-commerce activities in a big way, it could pick up some useful lessons from this venture.
Analysts find Wipro's current valuations too rich, although they don't doubt the company's strong fundamentals. Therefore, they have put the company on 'HOLD'.
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