Sudin Apte: Why HCL, Blackstone bought Geometric, Mphasis

The midcap IT space has suddenly lit up, with as many as two M&A deals being signed in two days.On Friday, HCL Technologies announced it would buy Geometric for Rs 1,237 crore while this morning, private equity firm Blackstone said it would buy majority stake in Mphasis in a deal that may be valued up to Rs 7,071 crore.In an interview with CNBC-TV18, Sudin Apte of Offshore Insights gave his take on the sector as a whole and on the M&A action that has been seen.

Below is the verbatim transcript of Sudin Apte's interview with Latha Venkatesh & Anuj Singhal on CNBC-TV18.Latha: What is your take on Mphasis-Blackstone deal? Is Blackstone making a good deal. Will it be able to take Mphasis to the next level?A: This was in process for a very long time and that has got a closure, which is good news. If Blackstone is able to get clients from their other investment portfolio then that will be an interesting dynamic to see. We have been seeing mergers and acquisitions in India which are primarily driven by either revenue goal or client goal or some specific technology driven acquisitions. This is one of the different acquisitions where the buyer says that one of the reasons why we are buying this company is that we can leverage offshore capability of this company for serving our portfolio. So, if they are able to get the growth, this surely should see success. However, it will be interesting to watch whether they really are able to get some of their clients to use offshore and who are not using offshore currently and also when investors say that they will use their portfolio companies to give the work, the existing clients get little jittery because they would start wondering what priority and what type of capability and importance they will get. So it will be interesting to see, over the next 18-24 months, how this pans out but to give a quick reaction, I would say that this was waited for very long time and now it has got to a closure. Anuj: The other deal of the morning has been the HCL Technologies-Geometric. How have you read that? A: I had mentioned on your channel on April 2 that this is clearly a capability purchase, primarily; there may be a minor interest of HCL to get growth in their engineering services but as the market changes and as more and more clients wants integrated engineering, HCL has a strong capability on embedded or auto electronics as well as on software side but mechanical engineering was a weaker link and as auto clients especially or discrete manufacturing clients ask companies to offer integrated engineering and what I mean by that is not only auto electronics or software or embedded software but also some mechanical capability. So, more and more clients, we see telling us that if power train works for us or fuel injection systems for us also do mechanical piece as well as maybe a chip on top of it or a particular embedded application on top of it. So, HCL gets that capability and second weak link from HCL was Product Lifecycle Management (PLM), so it gets PLM piece as well. So that deal is very clear to me, capability purchase and Geometric was a struggling company, wasn't going anywhere as standalone engineering services company. So for them and their shareholders there is a path ahead now and HCL get some good capability and possibly some new set of clients which are not existing HCL clients but are Geometric's clients, maybe for a smaller engineering piece.

Latha: Are you buying Blackstone's claim. You know the management quality of most of the IT companies. However, I am not asking you for a stock price position. I am asking you to bet on this management and the claims that Blackstone is making. Are they betting right?

A: If you look at Mphasis as a company, their current business can be divided into three parts. HP business, via HP business and Mphasis business, which has nothing to do with HP. So, first, the third business, which is HP business; they have assured, at least that is what we heard, so that piece looks to me is taken care of. Second, I would be concerned about the business which was coming via HP where Mphasis and HP were going together and as an offshore option to HP's existing clients; they were leveraging Mphasis to defend those accounts against Tata Consultancy Services (TCS) or Cognizant or whosoever. So that revenue will be interesting to see, how they guard and third, the new revenue surely is an issue. So two parts on management question - whenever such an acquisition happens, howsoever we say at this point in time, they would continue on existing leadership and the management continues, there is going to be some rejig in terms of strategy and in terms of some of the people at guard, so I would say that any such deal brings in 12-18 months of uncertainty when the company will be busy internally to restructure their house, assign new roles and things like that and after that they have to go to clients. If past history of Mphasis, last two-three years, is any indication, they are not in a position to win the deals in a competition especially in financial services, not only against Cognizant and TCS but also against some of the mid tier providers.