Electronic Data Systems Corp. (EDS) has decided to merge its Indian services subsidiary with MphasiS BFL Ltd., a listed Indian outsourcer in which EDS acquired a majority share in June, the companies announced Wednesday.
The swap ratio of the merger as determined by an independent valuation of the two companies works out to five shares of MphasiS for every four shares of Electronic Data Systems (India) Pvt. Ltd (EDS India), the companies said.
EDS, which currently holds 51.4 percent of MphasiS, will increase its stake to 61.8 percent after the merger, said MphasiS Chief Financial Officer Alok Mishra in a telephone interview on Wednesday.
The move by EDS to merge its own operations with MphasiS, a listed company based in Bangalore, runs contrary to the strategy of most multinational companies that prefer to de-list the companies they have acquired in India and run them as wholly owned subsidiaries.
In 2003, for example, Hewlett-Packard Co. (HP) bought out the public share holding in Digital GlobalSoft Ltd., a software development and services subsidiary in Bangalore in which it had a majority holding. At the time, HP said it did not want a listed subsidiary in India to avoid being accountable to two sets of shareholders – its own shareholders and those of Digital GlobalSoft. IBM Corp. also bought out its joint venture partner to run its Indian operation as a wholly owned subsidiary.
Rather than run as a wholly owned subsidiary in India, which essentially operates as a cost center, EDS sees benefits in operating through MphasiS, which has operated in a competitive environment, Mishra said.
Currently, EDS employs more than 3,000 people in India and operates applications and business process outsourcing (BPO) delivery centers in four locations. After the completion of the merger, the combined entity will have more than 15,000 employees.
Earlier this year, EDS and MphasiS announced plans to increase their total staff to about 20,000 employees by the end of 2006.
A single operation in India has a number of advantages including avoiding duplication of efforts and functions, according to Mishra. “Having a single operation makes sense from the perspective of the client and from the point of view of efficiency of delivery,” he said. If EDS were to retain a wholly owned subsidiary, there would always be a suspicion in the minds of MphasiS’ shareholders that business that could come to MphasiS was being diverted to the wholly owned subsidiary, he added.
The EDS move comes at a time when multinational services providers such as IBM Corp., Capgemini SA and Accenture Ltd., are hiring staff in large numbers in India to build a low-cost offshore services delivery capability.
The process of operationally integrating EDS India into MphasiS is expected to be completed by the end of this year, Mishra said.
The proposal is subject to approval of the stock exchanges, shareholders of both companies and the High Courts at Mumbai and Karnataka.