MphasiS shares jumped on Monday as the street gave a big thumbs up to the IT company's announcement that it is acquiring Orlando, Florida-based Digital Risk LLC. It is anall cash deal worth USD 175 million, plus some earn-outs, which will be based on revenue earnings targets.
Digital Risk provides highly specialised risk, compliance and transaction management solutions for the mortgage industry.
MphasiS shares have been flat so far this financial year, largely due to the issues over at its parent , the computer maker Hewlett Packard. After all, HP business accounted for 55 percent of MphasiS revenue in the quarter ended July 31.
Investors were quick to cheer this deal, as it will help MphasiS grow its direct business and boost earnings.
Digital Risk has had a compunded revenue growth of 70 percent over last three years and is expected to clock revenue of USD 127 million in the year-ending December,
The company is licensed to operate in 46 states in the US and its Making Mortgages Safe solutions suite is deployed by over 15 blue chip clients across key mortgage constituencies -- originators, insurers, issuers and investors.
"This allows us access to the US mortgage market which is roughly about USD 1.3 trillion and the IT services portion even at 1 percent, averages to be a USD 13 billion market with the segment of risk and compliance growing significantly. The acquisition also addresses the risk of being focused on business from HP and will obviously add to our top-line," CEO Ganesh Ayyar told CNBC-TV18.
Ayyar expects the acquisition will be break-even or slightly margin accretive to MphasiS' earnings in the first year.
Apart from the opportunities in the US residential mortgage market, Ayyar said in a seperate conference call that Digital Risk's solutions could be expanded to other financial areas like credit cards and even exported to other countries. However, Ayyar is quick to add that MphasiS will be selective in terms of geographical growth.
There is also a very little overlap in the customer base of the two companies. So MphasiS could offer some of Digital Risk's solutions to some of its own customers in the banking and insurance space.
Digital Risk has EBITDA margins around 13 percent and Ayyar said, MphasiS will look to increasing the margins over the next few years.
Ayyar plans to leverage MphasiS' scale and access with Digital Risk's specialisation to generate more profitable growth for the company. He hopes to announce details of the plan as soon as the transaction is concluded by the end of January 2013.
The US company has 1,500 mortgage specialists and the company had earlier this year announced plans to add over 1,000 jobs over next two years. Ayyar confirmed that there are plans to increase the US headcount.
This deal will help MphasiS gain a foothold in the US mortgage market, but will the acquisition strain its balance sheets and erode cash reserves, at a time its parent HP remains in turbulence?
Ayyar dismisses the concerns.
"As far as our cash reserves are concerned if you look at the last three quarters, we have been adding cash anywhere between USD 40-50 million every quarter. So I am not too worked up about the cash position because the cash is being used as planned and has been announced to the public," he says.
In fact, Ayyar says MphasiS will continue to look out for buyouts, although the current focus will be on generating adequate cash from its recent acquisitions, that includes insurance software provider Wyde Corp.
MphasiS shares were up 4.2 percent at Rs 404.60 on NSE in afternoon trade.
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