A recent story in an Indian newspaper raised the possibility that IT services heavyweight EDS ( EDS) is close to buying a controlling stake in Indian outsourcing company Mphasis -- a move that analysts say will go a long way to securing a better foothold in the offshoring market. The Financial Express recently reported that EDS is making an offer to buy Baring Equity Partners' stake -- about 35% -- in Mphasis for $800 million. While one analyst questioned the validity of the price tag, he said the deal itself makes sense. "I think it's very credible that EDS is prone to do this acquisition," said Rod Bourgeois, a Berstein Research analyst, who issued a note on the possible deal this week. "We've been arguing since earlier this year that EDS was going to do an offshore acquisition, and Mphasis is a logical candidate," the analyst said. Both companies, however, were tight-lipped on the prospective deal. "EDS is looking for a partner in India, and we've been talking with them, but everything else is just speculation and rumor," said Jeroen Tas, vice chairman of Mphasis. EDS spokesman Bob Brand declined to comment. Bourgeois said the "suspect" cost of the deal "implies a massive premium for Mphasis' current price." While the top Indian IT services companies Infosys ( INFY), Satyam ( SAY), Wipro ( WIT) and TCS trade at 24 times forward earnings on the local Indian market, the price for Mphasis would represent a price-to-forward earnings multiple of 52 times. He speculated that the $800 million figure applies to 100 % ownership of Mphasis, rather than the 34.8% stake. The potential deal could help EDS build offshore capability by adding 10,000 people. In addition, Mphasis would help EDS beef up its presence in financial services, as 55% of Mphasis revenue is generated from that sector, Bourgeois said.
By acquiring Mphasis, EDS would also shore up its BPO (business process outsourcing) services -- a hodgepodge of office functions other than IT, such as finance and accounting, claims processing, technical help desk and call centers, Bourgeois said. Bourgeois, who rates EDS market perform and does not own shares of the company, believes that EDS needs to augment its offshore presence to better compete with other traditional IT services giants such as IBM ( IBM) and Accenture ( ACN). Currently, EDS has about 12% of its employees in offshore locations; its competitors have about 20% offshore. Acquiring Mphasis would boost offshore head count to 19%. "In our view, EDS has been a little bit behind in building their offshore capability," Bourgeois said. EDS was off 3 cents to $27.39 in afternoon trade Wednesday.