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With Hewlett-Packard’s (NYSE:HPQ) recent Autonomy debacle continuing to haunt the company, the hardware manufacturer is looking to give investors a successful acquisition story and expand the company’s operations beyond its slumping software and printing business. MphasiS, a unit of H-P, took a step towards this goal on Monday by announcing that it had agreed to purchase Digital Risk for $175 million.
Why Digital Risk?
“This acquisition is central to our strategy of offering specialized services in chosen segments,” stated Ganesh Ayyar, the Chief Executive Officer of MphasiS, in a press release. “Digital Risk offers highly specialized services in risk and compliance area, specific to mortgage industry.”
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India-based MphasiS, which provides information technology services to H-P’s Enterprise services division, has been under pressure for the past year. Because Hewlett-Packard owns a 60 percent stake in MphasiS and its business accounts for more than half of the company’s total revenue, its profitability is greatly dependent on the growth of H-P’s business. However, since October 2011, revenue from the company’s H-P business has fallen significantly, and MphasiS decided to expand its enterprising business by incorporating the specialized mortgage services of Digital Risk.
Digital Risk, which will act as a standalone business unit upon acquisition, will enable MphasiS to provide risk, compliance, and transaction management solutions for the U.S. mortgage industry.
The deal is expected to close at the end of January.
CHEAT SHEET Analysis: Is This Acquisition a Positive Catalyst for H-P’s Stock?
One of the core components of our CHEAT SHEET Investing Framework focuses on catalysts that will move a company’s stock. Mergers and acquisitions or joint ventures are always events investors should watch closely. How much money is being spent? How quickly will shareholders recognize a return on investment? While investors may be much more concerned about future acquisitions after H-P’s Autonomy purchase, the particulars of this deal are quite different; the Autonomy deal cost the company $11.1 billion dollars, while Digital Risk will cost only $175 million. Furthermore, H-P is not counting on the purchase to transform its business as it had with Autonomy. The company expects the transaction to be earnings accretive after the first year.
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