The deal is done and Hewlett-Packard (HP) and Electronic Data Systems (EDS) will not be a combined and the focus is on MphasiS in which EDS holds majority stake close to 61% and the hope, expectation or belief is that there will be an open offer now.

Moshe Katri, MD of Cowen & Co believes the Hewlett Packard - EDS combine will take time to capture markets. The combination will take three to four years for synergies to emerge.

Siddharth Shah of Nishith Desai & Associates said HP might have to make an open offer because of the intent to acquire EDS.

Excerpts from CNBC-TV18's exclusive interview with Moshe Katri and Siddharth Shah:

Q: Do you think they will indeed have to make a voluntary open offer for MphasiS or could this be put across to the exchanges as an amalgamation that may not require that to happen?

Shah: I think it would be important to get the perspective of the Takeover Code. Clearly indirect acquisitions would fall within the purview of the takeover code

What needs to be seen is the form and fashion in which the acquisition is accomplished, but if the intent is to acquire and the merger is only a means of consummating the acquisition, then there are enough case logs and precedence which suggests that HP would have to make an open offer.

Q: There is a big disconnect in the margin performance between EDS and HP, how keen do you think HP would be to pick up additional stake in some of these subsidiaries or acquisitions that EDS has had in the past?

Katri: As we know that HP has a captive center in India and we have been saying in the past six-twelve months that a lot of the companies do have captive centers offshore are are going to give up considering the fact that the costs are going up.

Q: What do you think the final end to this might be because a lot of people are drawing comparisons to what happened in the past with Digital Global? Do you think when there are so many diverse entities within the same region, the possible way to go about is to do that open offer, de-list the stock and then try to consolidate all the operations in one whole?

Shah: That definitely seems to be a possibility and there has been one other perspective where Sebi in the past has given regard to the fact as to whether as part of the acquisition, was it really an intent to acquire the Indian operations and if the Indian operations form an insignificant portion of a global reorganization. In case of TECHNIP and other cases, they have been exempted from making an open offer. So it needs to be seen as to how HP proposes to consummate this whole acquisition.

Q: Do you think there is a case for HP at this point in time to seek exemption in case they are not very keen picking that stake in Mphasis?

Shah: It is slightly early to say, but as more facts come out, there maybe a case. If the Indian operations form an insignificant portion of large global operations and if the acquisition of the Indian entity is incidental to the global acquisition, there have been precedence in the past where an exemption has been granted.

Q: As we understand it, there is now 7% market share that the combine would probably get in the entire pie, by way of business prospects do you think the filter down effect for something like MphasiS might be a lot larger in the future, do you think their revenue prospects might get boosted by this move?

Katri: I think that is a bit misleading, because we feel that in the near-term the biggest challenge is integration. At this point with one captive center in India it is probably going to help the tier I offshore company in terms of attrition rates and wage inflation. In the long run, I think it is going to take some time for this combined entity to be able to capture market share unless they are willing to do that at lower prices and lower margins.

Q: In the management conference call, was there any reference to their plans in India with the Indian subsidiaries? What does this mean for the global IT outsourcing space for Indian companies in particular, which are getting a lot of the business from the US such as Infosys and Satyam?

Katri: I think that if you listen to the conference call, it seems that HP’s management has not really understood what they are really acquiring or what they are really buying. One of the questions was are you aware that EDS has been behind the curve in terms of building a scalable significant offshore delivery model and I think that HP is going to have to invest much more in order for them to be able to build the delivery capability and compete against the tier I offshore vendors itself.

I think the tier I offshore vendors at this point continues to be the main driver and continues to be the secular shift away from budget for onsite towards offshore projects and it is all about penetration rates and at this point it still remains pretty low. The tier I offshore vendors still remain in a pretty decent position. The HP-EDS merger is not going to do anything at this point in terms of the competition or the market share.

Q: Give us one final word on how long you expect this entire process to drag out; as you have pointed out there are several integration issues? Do you think this is going to be a big time drawn out issue and not something that is going to get resolved in a hurry whether it is for the Indian component or anyone else?

Katri: Let me give you a comparison, it took IBM about four years to integrate TWC Consulting. The integration has cultural issues, problem contract issues etc. So I would say at least three-four years until they will be able to get some of those synergies and leverage that business if they plan to get any market share with EDS. So it is going to be sometime.

Disclosures:

The analyst or his household members do not hold any financial interest. The firm and affiliates do not hold 1% or more ownership interest or any other material conflict of interest. The subject company is not a client of the firm or its affiliates. The analyst is not an officer or director of the company and the analyst or the firm do not receive compensation from the company.