TECH MAHINDRA (TM) may have emerged the winner among the bidders for Satyam Computer Services, offering $351 million to acquire a 31 percent stake in the troubled IT firm, but the issue of sustainability is a big concern. Market predictions about the deal are divided: while there is a body of opinion that believes in the symbiosis the deal might create, there have also been apprehensions mentioned in business journals about an expensive future for TM.
TM’S Rs 58 per share bid overcame other bidders such as Larsen & Toubro (at Rs 49.5 per share) and Wilbur Ross (at Rs 20 per share). Apart from the $351 million, TM will have to pay another $227 million for a further 20 per cent of the shares through an open offer. While the need for extensive restructuring at Satyam makes this a challenging deal for TM, it does get the chance to mine Satyam’s diverse client base.
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In terms of expanding globally, 75 percent of TM’s business is generated from Europe, with British Telecom contributing more than 60 percent of the company’s revenues. Satyam is more focused on the US market, with over 70 percent of the company’s revenue being in dollars. There is also very little overlap of major clients, which makes the integration of the client base easy.
Another advantage for TM is that it has been focused on the telecom vertical, while Satyam’s core strength is enterprise applications, with significant presence in other verticals such as manufacturing, healthcare and financial services. In fact, TM has been unable to win large deals (except from British Telecom), partly due to its relatively smaller scale of operations. It also needs presence in other verticals — this is where buying a majority stake in Satyam will certainly help. As reported in consulting company Frost & Sullivan’s journal, this acquisition can result in providing a multi-vertical presence and a higher scale of operations to TM.
Satyam’s revenue is down by 17 percent; another 13 percent loss is expected
Other sector watchers disagree. India Infoline (IIFL) journal feels that “while the proposed acquisition enhances TM’s service offerings and reduces client concentration, it brings a new set of unquantifiable risks”. IIFL predicts those risks will be legal liabilities and a potential loss of clients.
IIFL also reports that besides the 17 percent loss incurred by Satyam since January 2009, the management believes that another 13 percent loss cannot be ruled out. This estimate makes way for a tough future, as a 35 percent erosion in revenues is expected within one year. “The resultant impact on margins is severe and Satyam might incur losses in the next term,” says IIFL
At present a debt-free company with cash reserves of about Rs 700 crore, the acquisition of Satyam will put TM in the red. The entire acquisition is expected to cost Rs 2,200 crore. Additionally, substantial losses could be incurred from damages of up to $1 billion in the suit against Satyam Computers filed by Texas-based Upaid Systems, a suit in which Satyam has already lost one appeal. Even an out-of-court settlement could cost TM between $250 and $500 million, say informed sources. There are also about 12 class action suits in the US against Satyam.
Stock market analyst Hemen Kapadia believes the deal is a double-edged sword. “The problem lies with the amount of risk involved. TM could have well avoided the unnecessary risk,” he comments.
Now debt-free, Tech Mahindra — post the Satyam deal — could be a net debt company
As for the market sentiment, the divisions are deep. A majority of sector watchers feel the deal was a risk TM need not have taken. Stock market expert SP Tulsian believes, however, that the deal will eventually prove beneficial to both parties. “I differ with the common opinion that this deal should be avoided by TM, as it catapults them to a secure place among the top four IT companies in India,” he says.
HARISH BIJOOR of Harish Bijoor Consults Inc remarks, “While Satyam’s image is deeply tainted after the Ramalinga Raju episode, re-building the brand is still possible. Satyam is a business-to-business (B2B) brand, and it has about 4,600 potential clients. Though Satyam’s image in this circle is marred, image reconstruction is an easier process, as the number of potential clients is smaller, compared to B2C companies.”
Bijoor states that brand reconstruction of the new venture will be a gradual process: initially, the team should project 60 percent Brand Satyam and 40 percent Brand TM as a grouped entity, so as to illustrate the linkage between the two. The next phase would equally expose both brands, and the final phase would project TM as the larger brand and let Satyam take a back seat.
TM’s future steps will also certainly include initiatives promoting pronounced cost cutting. While TM chairman Anand Mahindra stated after the April 20 board meeting that the team put in place to run Satyam after B. Ramalinga Raju quit will be retained, AS Murthy, Satyam’s CEO, is understood to have told employees that, “Adjustments will be made within a month to trim costs”. Although, TM CEO Vineet Nayyar has said that layoffs will only occur as a last resort, some pink slips might be necessary to keep costs down.
TM has been low-key in commenting on the rebranding issue. “We will take a decision about rebranding Satyam in a few weeks. TM will also look at a merger of the beleaguered IT firm in a few years,” Mahindra is understood to have said at the meeting. Though an immediate merger seems to be ruled out because of company sales policies, the Mahindra & Mahindra chief could be hinting that a merged future could be a better one for both parties.
“I do not believe that Satyam is a sinking ship. Though it is not yet a racing car we will make it one”, vows Anand Mahindra.