A to Z of Satyam-Tech Mahindra deal

Satyam Computer Services Chairman Kiran Karnik (2nd L) and board members Deepak Parekh (2nd R), Tarun Das (L) and T. N. Manoharan attend a news conference held by Satyam board members in Mumbai April 13, 2009.

Tech Mahindra to be Satyam's new owner

Tech Mahindra has bought a 31 percent stake in the fraud-hit Satyam Computers. Tech Mahindra outbid Larsen and Toubro and other companies. In a race that saw only a handful of bidders, Tech Mahindra beat rivals such as engineering conglomerate Larsen & Toubro and U.S.-listed Cognizant Technologies. Tech Mahindra agreed to buy a 31 percent stake in Satyam at 58 rupees, a 23 percent premium to Satyams last closing price.

 Tech Mahindra, established more than 20 years ago as a joint venture between Mahindra & Mahindra and British Telecom, faces the daunting task of reshaping Satyam, a company at the heart of Indias biggest corporate scandal. Ever since Satyams founder Ramalinga Raju shocked markets by disclosing the $1 billion-plus fraud, there have been numerous reports of Satyams employees jumping ship and some clients cutting back on orders to Satyam. The companys accounts are also still being restated and its U.S. liabilities are unclear.

Satyam becomes Mahindra Satyam now

Satyam is no longer Satyam, but has become Mahindra Satyam as per the demands of the business. In fact, it's an irony that `What Business Mahindra Satyam logo.Demands', which was the tagline below Satyam's original logo, is now missing. Perhaps, the new management saw the futility of stating the obvious. The company unveiled its new brand identity, Mahindra Satyam. According to the company, this strategic move paves the way for the emergence of a robust brand, which draws from the core values of the Mahindra Group and the inherent strength of the Satyam brand.

How is Tech Mahindra funding the deal?

It's already in the market to raise Rs 600 crore through 4-5 year bonds. Close to Rs 700 crore will come from internal resources. Kotak Mahindra, which advised Tech Mahindra, is in touch with mutual funds, insurance companies, institutions like IDFC, HSBC and some NBFCs and PE funds to raise money since banks can't directly fund acquisitions. The company may also get a bridge loan to complete the initial payment. Market does not rule out an equity offering at a later stage.

Is Tech Mahindra overpaying?

The company doesn't think so. In the worstcase scenario, it does not expect Satyam's annual revenues to drop below $1.3 billion. The figure is arrived at after assuming 15 per cent of the revenues were overstated and factoring in client attrition, which would shrink the figure from $2.2 billion to $1.5 billion. If private equity investors step in later, it would indicate how much financial investors are willing to fork out for the stock. An outsourcing expert with a consultancy firm said, "Going by what Tech Mahindra has valued Satyam, I would say it is more of an entrepreneurial decision. They have been more aggressive. L&T on the other hand has been cautious."

Is this a merger?

Tech Mahindra has no plans to merge Satyam with itself because of latter's liabilities. The Pune-based firm will be handed reins of Satyam only after the bidding process is vetted by the Company Law Board, which appointed the board of directors that devised and managed the auction.

What would be Tech Mahindra's priorities?

To retain clients and attempt renewing over $300 million worth of outsourcing contracts through competitive pricing, reassess legal liabilities, negotiate out-of-court settlements with litigants such as the UK-based mobile services provider Upaid. Also, accelerate restatement of accounts (expected to be completed by May).

What Tech Mahindra cannot do?

Tech Mahindra is at liberty to bring in any kind of investor after the deal is done. However, the agreement says that they cannot strip the company and cannot sell the company piecemeal. They can take another partner if they want to, in the SPV, Deepak Parekh, Satyam board member said while announcing the highest bidder for Satyam

Will there be layoffs?

While most of the employees evoked a sense of relief after the winner was announced, many remained concerned about tough days ahead. This was true especially for those who are currently not part of any active customer project. Satyam professionals working in subsidiaries such as Nipuna, the BPO arm of the company, continued to be sceptical about the new owner fear that Tech Mahindra could look at rightsizing the company.

 Tech Mahindra has an agreement with Satyam to retain 100 key employees (which interestingly does not include Ram Mynampati). The fate of the remaining employees of Saytam would depend on the extent to which Tech Mahindra decides to downsize. The first set of casualties could be employees on the bench. Satyam has 43,500 direct employees. As customers seek to lower their IT spend, and even shift projects to other rivals, many Satyam employees

Tech Mahindra has a challenging task on its hands post its acquisition of Satyam, said industry observers. The factors that could make this integration a complex task are Tech Mahindras lack of experience in most of Satyams business verticals and issues relating to its own core business. Tech Mahindra certainly gets breadth in skills post merger (with Satyam). But what it lacks is depth in terms of a client base and leadership in the new verticals that it would get access to after the merger, said Edelweiss Securities IT analyst Viju George. Analysts also said that integrating a large pool of Satyam employees across verticals would be anything but easy. The business profiles of both the companies are totally different. While Tech Mahindra earns majority of its revenue from European market by providing telecom solutions, Satyam is far more diverse in verticals as well as geographies, said India Infoline IT analyst Rajiv Mehta.

How will both companies benefit

Far from being primarily a single-client company, the Tech MahindraSatyam combine will now complete for projects with the Big Three of Indian IT - Tata Consultancy Services, Infosys Technologies and Wipro and multinationals like IBM and Accenture. Satyam has land assets of around 425 acres in India, half of which is owned by the firm. The other half (125 acres) is land taken on lease. The estimated value of two of Satyam's own campuses in Hyderabad is around Rs 1,500-2,000 crore. The other major asset is its strong workforce

What will L&T do with the stock?

L&T still prefers to categorize the investment as strategic, thereby escaping the mark-to-market provision required for securities in the trading book. As per bidding rules, L&T can't sell the shares for six months. But it plans to hold on to the stock for longer than that. L&T holds 12 per cent in Satyam, which will go below 10 per cent after Tech Mahindra's fund infusion.

Thank you