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MphasiS's agreement to acquire Wyde Corp is marginally EPS accretive for MphasiS. With likely
20%+ use of treasury for accretion of just 2-3% to revenues and less than 1% to EPS through this
acquisition, synergistic benefits would be crucial in future. With ongoing organic growth
challenges, we maintain Hold.
Synergistic benefits would be crucial for Wyde Corporation's acquisition
MphasiS has announced it has entered into an agreement to acquire 100% equity stake in US
based Insurance software company Wyde Corporation in an all upfront cash deal.
While management has not disclosed the exact consideration, its indication of payout of 2.5-
3.5x revenues and Wyde's revenues worth US$30m in CY10, indicates likely payment
consideration of US$75m-105m (valuations at 14-20 x trailing PAT). However acquired
company has cash balances worth US$10m (with no debt), therefore excluding cash of the
acquired company, valuation would be close to 12-18x trailing PAT.
We believe that with this acquisition, MphasiS's cash balance would be depleted by over 20%
(from the levels of US$422m at the end of 2Q11). The acquisition would add just 2-3% to
revenues and less than 1% to EPS on a trailing basis. Besides this, the management also
indicated that the addressable market of Wyde Corporation is growing at 15% p.a. and
therefore wallet share gains by Wyde would be extremely important post acquisition by
MphasiS. Therefore, we believe synergistic benefits would be crucial to watch going forward.
Even on business derisking, this acquisition would reduce the revenue concentration from HP
channel by just around 2% from current levels of 67% where growth challenges continues to
remain high. Therefore considering high valuations given for the acquired company, growth
from Wyde Corporation in coming years would be crucial.
Considering any buy back plans in future (as indicated by the management earlier and likely
payout of not higher than US$50m-80m for any buy back to pass through by just a board
resolution which would be not more than 2-4% of market cap), headroom for more material
size acquisitions to derisk business would be limited in medium term, without taking on debt.
Wyde Corporation is an insurance software product company
Wyde has developed and deployed Wynsure, a software platform, at many of the insurance
carriers in North America and Europe. Wynsure is a multi-language, multi-currency,
customizable software that offers policy administration, claims and billing solutions across Life
& Annuities (L&A), disability, health, and Property & Casualty (P&C).
Wyde has over 200 employees with R&D centre in Paris, France. According to MphasiS, the
agreement also entails employee continuity plans, though the payment consideration does
not include any earn out payments in future. The sales team of Wyde seems very thin
currently with 8 employees (including 4 in France, 2 in US and 2 in Canada)
Wyde caters to a customer base of 25 which include Tier I as well as Mid-market insurers
(constituting over 75% of total client base) across US, France and Canada.
Wyde reported revenues worth US$30mn in CY10 with EBITDA margins of 18%, PBT margin
of 19% and PAT margin of around 17-18%. Wyde's insurance platform Wynsure got
commercialised only in 2006, while the company started way back in 1997. Current revenue
size being organic with top-5 clients contributing 50% of revenues (with top client
contributing 18%).
Out of Wyde's total revenues, around 27-30% comes from license sales, 6-8% through AMC
and balance from implementation/professional services. According to MphasiS management,
implementation services forms 2.5x of license revenues. With scalability being an issue on
services front as well as lack of offshore support for Wyde, promoters of Wyde decided to sell
Wyde Corporation to MphasiS. Around 60% of the total revenues are derived from L&A
segment and balance from P&C. Wyde is rated as one of the top-4 players within the policy
administration market by Gartner in L&A and P&C market.
Wyde has sold 8 licenses in CY10 with 6 licenses already sold in CY11 YTD. Besides having
good penetration within developed countries of US and Europe, Wyde is also successful in
selling its platform to emerging geographies including Vietnam.
A good fit for MphasiS
Currently Insurance vertical provides around 10% of MphasiS revenues and this acquisition
would lead to increase its contribution to over 12%. Organically MphasiS largely provides
IT/BPO services within the Property & Casualty segment (with application capabilities
strengthened through acquisition of AIGSS in 2009), while this acquisition will enhance its
capability to Life and Annuities segment. Even with this acquisition, MphasiS's revenues from
products and related services will increase to 2.5-3% from negligible revenues currently.
There is no client overlap and therefore cross selling opportunity would be healthy going
forward.
With Wyde's domain expertise in the policy administration (and robust R&D capabilities) as
well as MphasiS's reasonable base in offshore locations of India for IT/BPO services,
MphasiS's standing in Insurance vertical is likely to improve post this acquisition.
Even geographically Wyde's penetration within Continental Europe and Canada will help
MphasiS to penetrate its organic growth better going forward from these markets.
As per MphasiS, Wyde currently outsources the system integration related work (equivalent to
around 2-2.5xlicense revenues) and post MphasiS's acquisition, opportunity would be
enhanced for Wyde Corporation. However we believe that system integration would a low
margin business and therefore with additional revenue opportunity, accretion to PAT through
system integration would be lower.
Valuation and view
We do believe that an agreement to acquire Wyde Corporation is a good fit for MphasiS,
however it is not material to derisk the organic business risks of MphasiS. With continuing
challenges within HP channel revenues as well as high competitive pressure within direct
channel, we re-iterate Hold.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MphasiS's agreement to acquire Wyde Corp is marginally EPS accretive for MphasiS. With likely
20%+ use of treasury for accretion of just 2-3% to revenues and less than 1% to EPS through this
acquisition, synergistic benefits would be crucial in future. With ongoing organic growth
challenges, we maintain Hold.
Synergistic benefits would be crucial for Wyde Corporation's acquisition
MphasiS has announced it has entered into an agreement to acquire 100% equity stake in US
based Insurance software company Wyde Corporation in an all upfront cash deal.
While management has not disclosed the exact consideration, its indication of payout of 2.5-
3.5x revenues and Wyde's revenues worth US$30m in CY10, indicates likely payment
consideration of US$75m-105m (valuations at 14-20 x trailing PAT). However acquired
company has cash balances worth US$10m (with no debt), therefore excluding cash of the
acquired company, valuation would be close to 12-18x trailing PAT.
We believe that with this acquisition, MphasiS's cash balance would be depleted by over 20%
(from the levels of US$422m at the end of 2Q11). The acquisition would add just 2-3% to
revenues and less than 1% to EPS on a trailing basis. Besides this, the management also
indicated that the addressable market of Wyde Corporation is growing at 15% p.a. and
therefore wallet share gains by Wyde would be extremely important post acquisition by
MphasiS. Therefore, we believe synergistic benefits would be crucial to watch going forward.
Even on business derisking, this acquisition would reduce the revenue concentration from HP
channel by just around 2% from current levels of 67% where growth challenges continues to
remain high. Therefore considering high valuations given for the acquired company, growth
from Wyde Corporation in coming years would be crucial.
Considering any buy back plans in future (as indicated by the management earlier and likely
payout of not higher than US$50m-80m for any buy back to pass through by just a board
resolution which would be not more than 2-4% of market cap), headroom for more material
size acquisitions to derisk business would be limited in medium term, without taking on debt.
Wyde Corporation is an insurance software product company
Wyde has developed and deployed Wynsure, a software platform, at many of the insurance
carriers in North America and Europe. Wynsure is a multi-language, multi-currency,
customizable software that offers policy administration, claims and billing solutions across Life
& Annuities (L&A), disability, health, and Property & Casualty (P&C).
Wyde has over 200 employees with R&D centre in Paris, France. According to MphasiS, the
agreement also entails employee continuity plans, though the payment consideration does
not include any earn out payments in future. The sales team of Wyde seems very thin
currently with 8 employees (including 4 in France, 2 in US and 2 in Canada)
Wyde caters to a customer base of 25 which include Tier I as well as Mid-market insurers
(constituting over 75% of total client base) across US, France and Canada.
Wyde reported revenues worth US$30mn in CY10 with EBITDA margins of 18%, PBT margin
of 19% and PAT margin of around 17-18%. Wyde's insurance platform Wynsure got
commercialised only in 2006, while the company started way back in 1997. Current revenue
size being organic with top-5 clients contributing 50% of revenues (with top client
contributing 18%).
Out of Wyde's total revenues, around 27-30% comes from license sales, 6-8% through AMC
and balance from implementation/professional services. According to MphasiS management,
implementation services forms 2.5x of license revenues. With scalability being an issue on
services front as well as lack of offshore support for Wyde, promoters of Wyde decided to sell
Wyde Corporation to MphasiS. Around 60% of the total revenues are derived from L&A
segment and balance from P&C. Wyde is rated as one of the top-4 players within the policy
administration market by Gartner in L&A and P&C market.
Wyde has sold 8 licenses in CY10 with 6 licenses already sold in CY11 YTD. Besides having
good penetration within developed countries of US and Europe, Wyde is also successful in
selling its platform to emerging geographies including Vietnam.
A good fit for MphasiS
Currently Insurance vertical provides around 10% of MphasiS revenues and this acquisition
would lead to increase its contribution to over 12%. Organically MphasiS largely provides
IT/BPO services within the Property & Casualty segment (with application capabilities
strengthened through acquisition of AIGSS in 2009), while this acquisition will enhance its
capability to Life and Annuities segment. Even with this acquisition, MphasiS's revenues from
products and related services will increase to 2.5-3% from negligible revenues currently.
There is no client overlap and therefore cross selling opportunity would be healthy going
forward.
With Wyde's domain expertise in the policy administration (and robust R&D capabilities) as
well as MphasiS's reasonable base in offshore locations of India for IT/BPO services,
MphasiS's standing in Insurance vertical is likely to improve post this acquisition.
Even geographically Wyde's penetration within Continental Europe and Canada will help
MphasiS to penetrate its organic growth better going forward from these markets.
As per MphasiS, Wyde currently outsources the system integration related work (equivalent to
around 2-2.5xlicense revenues) and post MphasiS's acquisition, opportunity would be
enhanced for Wyde Corporation. However we believe that system integration would a low
margin business and therefore with additional revenue opportunity, accretion to PAT through
system integration would be lower.
Valuation and view
We do believe that an agreement to acquire Wyde Corporation is a good fit for MphasiS,
however it is not material to derisk the organic business risks of MphasiS. With continuing
challenges within HP channel revenues as well as high competitive pressure within direct
channel, we re-iterate Hold.
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