On the December quarter earnings call of Bengaluru-headquartered IT firm Mphasis, one name was conspicuous by its absence—Blackstone. The US-headquartered private equity giant, which owns a majority stake in the company, wasn’t mentioned even once. In the earning calls for the four quarters preceding this, Blackstone had been mentioned a grand total of 25 times.
Blackstone’s significance to the mid-tier IT firm goes beyond just ownership. It has a strategic import to the company. In July 2020, Mphasis CEO Nitin Rakesh stated on the earnings call for the quarter ended June that Blackstone’s portfolio companies contribute about 4-5% of Mphasis’ revenue. Rakesh has repeatedly stressed that these companies would be crucial drivers of growth.
The radio silence on Blackstone in the most recent call, therefore, speaks louder than all previous mentions combined. Especially when taken with recent reports that Blackstone is looking to exit Mphasis. In an emailed response to detailed questions from The Ken, Mphasis said it doesn’t comment on rumours or speculation. Blackstone did not respond to an emailed set of questions. A deal between the two, though, may not be far off.
While PE investors typically exit only after a 7- or 10-year cycle, Blackstone has no such qualms. In 2011, it exited BPO firm Intelenet just five years after buying a stake in the company. In 2015, it bought into the company again. Then, in 2018, it finally exited the company for $1 billion. All told, Blackstone saw a 4X return on its investment into Intelenet. Blackstone has shown that it isn’t bound by conventional investment cycles—it knows when to cash in its chips.
Mphasis presents a similar opportunity. In the nearly five years since Blackstone acquired the company from American hardware major Hewlett-Packard (HP), it has orchestrated an admirable turnaround. To its credit, Blackstone did not ride roughshod over public shareholders in Mphasis by force-merging it with its other investee companies. Today, Mphasis is firmly back on the growth path and has more than its fair suitors. As per reports, four PE players—Carlyle, Bain, Brookfield, and Permira—are in the race to buy it.
Given that most IT companies have had a bumper 2020 as businesses embraced digitisation, adopting cloud and work-from-home solutions, Blackstone’s decision seems counter-intuitive. Blackstone, though, may want to get out of Dodge before the music stops. Already, a revenue commitment it secured from HP when it acquired Mphasis is drawing to a close.
The deal will be significant in many ways. At about $2.4 billion, it would be among the largest deals so far in the mid-tier Indian IT space. The deal size would be more than 5X the $465 million that Baring PE Asia paid for a majority stake in Navi Mumbai-headquartered IT services firm Hexaware in 2013.