MphasiS, the Indian services subsidiary of Hewlett-Packard (HP), said on Wednesday that it reached a definitive agreement to acquire AIG Systems Solutions Pvt. Ltd. (AIGSS), the IT services arm in India of insurer American International Group (AIG).

The move by MphasiS will strengthen its presence and expertise in the insurance and financial services markets, said Ganesh Ayyar, CEO of MphasiS, in a telephone interview on Wednesday.

With operations in Chennai and Kolkata in India, AIGSS has more than 800 employees, and offers services to AIG companies worldwide.

About 40 percent of MphasiS' revenues currently come from the financial services and insurance industries.

The company does work for a number of insurance companies including AIG, and the company plans to use the operation to address new customers, said Gopinathan Padmanabhan, president of the Applications Services Business Unit at MphasiS.

"When the recovery happens, a lot of pent up demand from all the insurance companies will come up, and we will be well positioned to get the business," Padmanabhan added. Even during the crisis, MphasiS' business from the financial services and insurance sectors has been growing, Ayyar said.

AIG's Indian operation will add expertise in areas of insurance such as personal auto insurance, and retirement products in which MphasiS did not have the expertise, Padmanabhan said.

It will also strengthen existing expertise in areas such as life insurance, he added. MphasiS did not disclose the price at which it is acquiring AIGSS, nor whether the deal involved a commitment of business from AIG. After the acquisition and integration of the AIG operation, MphasiS will continue to deliver services to AIG, Ayyar said.

The transaction is subject to legal and statutory requirements.

MphasiS, a company listed on Indian stock exchanges, was a subsidiary of Electronic Data Systems (EDS) from June 2006, after EDS acquired a majority stake in the Indian outsourcer. The company is now a subsidiary of HP, after parent company EDS became a wholly-owned subsidiary of HP in August last year.

Multinational companies have set up or acquired services subsidiaries in India to take advantage of the country's abundant and relatively low cost staff.

Some of them are, however, selling off these subsidiaries to raise cash and transfer the risk of running these operations to service providers, said Siddharth Pai, a partner at outsourcing consultancy firm, Technology Partners International Inc (TPI).

Valuations for these subsidiaries are low, as service providers are factoring only the continued business from the seller, Pai said. In the past, service providers paid a high amount for these subsidiaries hoping to use their expertise to address other customers in the same industry segment, he added.

Even as some companies are hiving off their Indian services subsidiaries, others are still setting up new services subsidiaries, Pai said. The decision to outsource or do the work in-house at a subsidiary varies from company to company, and the kind of work they want to send to India, he added.