CMP: Rs3197 | Target Price: Rs2900
■ Mphasis has acquired Blink UX, a US-based user experience research, strategy, and design firm, for a cash consideration of up to USD94mn (~2.7x EV/Sales on a CY21E basis), including earn-outs. Blink UX works with some of the world's leading enterprises to create transformative digital products, brands, and experiences.
■ Deal rationale: The acquisition of Blink will boost Mphasis's experience competencies with end-to-end capabilities in user experience research, strategy, design, and implementation. Blink also brings marquee logos (Facebook, Amazon, Google, Microsoft, NASA, Dell, HP, T-Mobile, etc.) in technology and consumer industries, with an average ~10-year relationship and strong synergy potential in the Hi-Tech and BFS verticals. The acquisition is expected to be revenue-accretive and in line with Mphasis's Front2Back transformation and growth strategy. Management indicated that Mphasis Tribes and Services that benefit from Blink contributed ~70% of its FY21 deal pipeline. It will help Mphasis to expand the addressable market in its Direct accounts, which augurs well for growing revenue from these accounts. The integration of Blink's leadership team will further strengthen Mphasis's leadership team as well.
■ Deal structure and timeline: Mphasis Corporation, USA, a wholly owned subsidiary of Mphasis, has signed the definitive agreement in nature of agreement for Plan of Merger between Mphasis Corporation and Blink Interactive, Inc. The acquisition was closed on September 21, 2021.
■ Financials: Blink is expected to post revenues of USD33-35mn for CY21. It has delivered ~42% revenue CAGR over CY17-20 (partly aided by small acquisitions). The acquisition is margin-accretive on a standalone basis (it operates at higher gross margins than Mphasis's ~30% and even slightly better EBITDAM/EBITM). However, intangible amortization charges and performance-based retention costs are expected to impact combined entity EBITM by ~100bps for the first two years (~USD15-17mn impact each year). Management indicated that both these factors would evenly contribute in the first two years, assuming amortization of intangibles over five years and retention payment costs in the next two years.
■ Brief profile of Blink UX: Blink Interactive, Inc., headquartered in Seattle, Washington, was founded in 2000 and provides design consultancy services around user experience, user research-based software product design and strategy, and customer experience design for marquee brands. Blink has over two decades of expertise using its Evidence-driven Design process to define digital user experiences for clients. Blink has more than 130 employees and has additional studios in Austin, Boston, San Diego, and San Francisco. It had 65 clients as of CY20 and ~90% of its revenues came from born-digital companies and the rest from BFS, consumer, telecom, and other verticals.
■ Our view: The acquisition will add marquee logos in Hi-Tech and expand Mphasis's design & experience capabilities. TAM for the upstream user research, strategy and design is estimated to be USD24bn and is growing at 25-30% p.a., i.e., 4-5x the overall IT services market. Cross-selling opportunities among the existing client base and access to marquee logos augur well for revenue growth in the medium term. Given the size of the acquisition (1-2% revenue accretion/2-3% EBIT cut due to retention payment and amortization charges in FY22), we do not expect any meaningful revision to our earnings estimates. We have a Hold rating on the stock with a TP of Rs2,900 (29x Sept'23E EPS).