The game changer

The sordid saga of Satyam is finally over. Customers and employees of what used to be India’s fourth largest software services firm can breathe easy now, as the new board of Satyam has found a perfect suitor in Tech Mahindra. Anand Mahindra (Left) and Tech Mahindra vice chairman and MD Vineet Nayyar interacting with the media on the acquisitionThe three wise men—Deepak Parekh, C.K. Achuthan and Kiran Karnik— appointed by the Government to oversee the beleaguered company’s affairs have pulled off a feat of sorts because Satyam will live to see another day. Says Karnik, a Satyam board member: “In many ways, I would say today marks the rebirth of Satyam.” Merely four months after its founder B. Ramalinga Raju admitted to fudging the books, Satyam’s new board has managed to salvage the company despite all odds.The board, which kicked off a global competitive bidding process in March, selected Venturbay Consultants, a subsidiary of Tech Mahindra, as it emerged as the highest bidder at Rs 58 per share. Larsen and Toubro (L&T) and Wilbur Ross, the other two bidders, came up with bids of Rs 45.50 and Rs 20 respectively, giving Tech Mahindra a clear lead. In many ways, I would say today marks the rebirth of Satyam, says Kiran Karnik, member, Satyam boardWhile the deal awaits the approval of the Company Law Board, Tech Mahindra will have to pay Rs 1,756 crore for the 31 per cent allotment of preferential shares in the next few days.Satyam’s acquisition marks the entry of Tech Mahindra, which has so far focused on the telecom vertical, into other verticals such as financial services, healthcare and manufacturing. Tech Mahindra has only had a presence in Europe, with 60 per cent of its Rs 4,463-crore revenues coming from British Telecom. No wonder, Anand Mahindra, chairman of Tech Mahindra, calls this acquisition a “game changer” as it gives the company much-needed diversification. Back in the big league.preferred-source-banner{ margin-top: 10px; margin-bottom:10px;}InfosysRevenues FY09: Rs 21,693 crEmployees: 1,04,850Market Cap: $16.17 bnClients: Cisco, Suncorp, United Stationers, ThermaxWiproRevenues FY09: Rs 25,562 crEmployees: 96,965Market Cap: $7.86 bnClients: Microsoft, Morrisons, Sun Micro, Norwich-Union, PrudentialTata Consultancy ServicesRevenues FY09: Rs 28,562 crEmployees: 1,30,343Market Cap: $11.25 bnClients: Cummins, British Airways, Agilent, GE, Nissan, ChryslerTech MahindraRevenues FY09: Rs 4,463 crEmployees: 25,429Market Cap: $679 mnClients: British Telecom, Unisys, ABN AmroSatyamRevenues FY09: Rs 7,500 crEmployees: 48,000Market Cap: $750 mnClients: Cisco, CitigroupNew equityTech Mahindra+SatyamRevenues FY09: Rs 11,963 crEmployees: 73,429Market Cap: $14.29 bn*FY09 revenues, besides Infosys, are as expected by analystsOver the next few days, Tech Mahindra will have to deposit the initial subscription amount of Rs 1,756 crore, along with Rs 1,132 crore for the open offer to the public. The company has been given four working days to arrange the requisite funds, which it is likely to raise through debt or a private equity player. At this point of time, the company has Rs 700 crore in cash sitting in Tech Mahindra’s books. Says Raamdeo Agarwal, director and co-founder of Motilal Oswal: “At Rs 3,000 crore, Tech Mahindra is paying a fair price for an asset like Satyam, even though little is known about its liabilities.”While there is no clarity on Satyam’s actual revenues, people close to the deal believe that it could be in the region of Rs 7,500 crore. And even if net margins are as low as 10 per cent, the company’s net profit stands at Rs 750 crore. With Tech Mahindra paying Rs 2,888 crore for a 51 per cent stake in Satyam, the enterprise value of the company adds up to approximately Rs 6,000 crore. So Tech Mahindra is paying 10 times the company’s profit, which is a fair deal, claim analysts. Besides the acquisition cost, Tech Mahindra will also have to settle the class action suits pending in the US and UK. Analysts peg both the liabilities at $200 million.But it’s going to be an uphill task for Mahindra & Mahindra to clean up Satyam and make it run profitably again, given all its liabilities and reputation issues. The biggest challenge, as in any acquisition, is likely to be integration as Tech Mahindra is not owned by a large diversified group. Also, riding on Satyam will mean treading on unfamiliar ground, both in terms of geography and verticals. Given that Tech Mahindra has only 25,429 employees, the acquisition of a company bigger than itself may have its own challenges. While a combined employee strength of 73,429 may make Tech Mahindra next only to India’s third-largest IT services provider Wipro, managing the integration may not be easy.Mahindra’s upbeat speech may have won him many fans in Satyam, but that’s not going to prevent the company from right-sizing the workforce. Currently, 30 per cent of Satyam’s 48,000 employees are on the bench, so many of them may have to go. However, the bidding contract has stipulated that 100 people, as identified by the board, have to be retained for a year as they are critical to customers or projects. Moreover, Tech Mahindra will have to deal with the challenges of branding as it moves forward. Says Anil Advani, head of research at SBI Cap Securities: “Under which name will Tech Mahindra go to market? It’s a crucial question as Satyam as a brand has taken a hit and till its class action suits are settled, a name change is not possible.”As far as Tech Mahindra’s credibility and performance track record to revive a company like Satyam goes, analysts are awaiting a turnaround in the company’s fortunes once the books are in order. With a 12 per cent stake in Satyam, L&T is likely to benefit from such an eventuality given that it cannot sell the stock for another six months. For Anand Mahindra, one of India Inc’s poster boys, it is perhaps his biggest corporate test as he attempts to walk the talk.Published By: AtMigration Published On: Apr 17, 2009--- ENDS ---

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The game changer

It could be the rebirth of Satyam but huge challenges lie ahead for the new owners.

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