• MARCH 8, 2011

MphasiS : Unfair deal to minority shareholders?

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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