2011

Corporate Strategy: Acquisition of Satyam by Tech Mahindra

Anshul Bahre Roll Number - eMEP -10-041 1/27/2011

..................................................................... 5 Indian companies confirm bids for Satyam.................................... 6 Acquisition by Tech Mahindra .....................................................Table of Contents Jan 7th 2009: The day of confession ............... 10 2 .......................... 7 A friendly merger: Mahindra Satyam & Tech Mahindra ...................... 4 History of Satyam...................... 8 Reference.................................................................................................................................. 3 The history of Indian IT Industry ........

” says Suresh Senapaty. On January 7th Mr Raju confessed to cooking Satyam’s books for years. Indeed. The shares of Wipro. But many family firms are evolving into widely held corporations. But foreign investors can only take big positions in the firms they buy. fell by 9% on January 12th after the World Bank revealed it had barred the firm from doing business with it until 2011. another computing giant. Some hope that foreign investors might fill the gap. and his brother is equally hard to fathom. can you believe him? Many suspect that even now only 50% of the truth is out. and actually invest even less. according to an industry adage. Who will stand up for the minority shareholders? In America managers cower before pension funds and other powerful institutional investors. investors have been swift to punish even small infractions. they have an incentive to rip off other shareholders by siphoning off money. is hard to fake. programmers think they are 90% done for about 50% of the time. an Indian newspaper. They ought to be wary of inscrutable companies. but has since been spirited out of the company. And since half of India’s shares are held by promoters. That complacency has been shattered. only about 5% of GDP. Wipro’s transgression was to invite bank officials to take part in an oversubscribed share offering in 2000. Cash. Wipro’s finance chief. Many who did so lost money. They hold about 10% of the shares on the NSE. in the wake of the Satyam scandal. That paradox will be familiar to the owners of Satyam Computer Services. Ramalinga Raju. “It is a real debate whether it was a benefit at all.5 trillion rupees. a foreign fund cannot take a worthwhile position without managers’ acquiescence. Such tricks are not unusual in India. The danger is that as the stake held by insiders falls. insurance companies and mutual funds combined.Jan 7th 2009: The day of confession In any software project. So perhaps the money did exist. They are permitted to invest only 15% of their holdings in shares. even if the scale of the Satyam fraud is extraordinary. after all. and admitted that a $1 billion cash pile did not in fact exist. Its occupational pension funds hold assets worth 2. Satyam’s books were audited by PricewaterhouseCoopers. But were there hands in the till? But when a liar confesses. the auditor says it verified Satyam’s fixed deposits with the banks that held them. more than Indian banks. The scam perpetrated by its founder. giving the firms an incentive to change their ways. So funds are reluctant “to cheese off management too much” by complaining about corporate governance. which was once India’s fourth-biggest software and services firm. 3 . Indian “promoters” (who include business families and other corporate insiders) still hold almost half of the shares on the National Stock Exchange (NSE). B. According to the Economic Times. But India lacks a local equivalent.

strict Foreign Exchange and Regulation Act limiting its allocation. STP’s were allowed with basic infrastructure. Mumbai and Calcutta. charged with criminal conspiracy. Till this period policies were able to remove the barriers in IT industry but not completely. The major policy reforms were to recognize software as an industry to invest and make it eligible for incentives as other domestic industries. India did not see a development in IT industry during mid 70’s and this period was not so effective due to restricting imports of computer peripherals. The history of Indian IT Industry Though it was all started way back in the history the major growth of IT industry in India started from 1991 post-liberalization. there came a need of using UNIX over MS-DOS and which created a puzzle for local vendors to shift towards UNIX based platforms and made India become “Unix country”. 1990’s development was mainly because of STP’s. In 1990. In 1986 when all state-owned banks were standardizing banking process. South Indian states saw drastic changes in higher education after 1983. MRTP Act was replaced de-facto in 1991 which allowed unbiased trade practices there after. Satyam’s rivals may pick up its most lucrative customers and its best employees. Department of Electronics (DoE) introduced the concept of Software Technology Park (STP’s) in India. A notable turning point in the Indian software and IT industries policy environment was when Shri Rajiv Gandhi became PM in 1984. Another important event in mid 80’s was when GE’s chairman Jack Welch visited India in 1989 which led to GE’s technology partnership with India. reducing import tariffs and announcement of CSDT policy which liberalizes exposure to the latest technologies to compete globally and to capture a share of global software exports. But right now all that its Indian competitors want from Satyam is distance. his brother.Meanwhile Mr Raju. Satyam is in the hands of three directors appointed by the government. New Delhi. tax exemptions and also given 100% ownership for the foreign firms. During this period India saw dramatic changes in heavy investments on higher education and booming privately funding engineering colleges which made India ready with technical manpower resources. cheating and forgery. dependable power supply. high import tax. 4 . and Satyam’s chief financial officer are in custody. Chennai. If they do not act swiftly. This created IT clusters to form in and around Bangalore. where liberalization made a major impact on privately funded colleges. Hyderabad.

Achievements of Satyam Computers:   First Indian IT Company to get ITAA Certification for Y2K Solutions. Satyam went public in May 1992 and its issue was oversubscribed 17 times. In 2003. policy reforms to allow foreign investments in 1991 enabled for significant growth in development. In December 1995. In 2004. In 2005 Satyam acquired 100% stake in Singapore based Knowledge Dynamics. In the same year Satyam entered into a joint venture with GE. Satyam became the first Indian IT Company to get ITAA Certification for Y2K Solutions. Satyam Computers got its first Fortune 500 Client. In 1999. Satyam Infoway became the first Indian Internet company to be listed on NASDAQ. In June 1991. History of Satyam Satyam Computers was founded in June 1977 as a private limited company by Ramalinga Raju along with one of his brothers-in-law. High investments in higher education and formation of prestigious engineering colleges. In May 2000 Satyam became the first organization in the world to launch Customer-Oriented Global Organization training. Satyam opened new development center in Mississauga. From just programming and documentation work India emerged to implementation. Davos. R&D. Satyam entered into a joint venture with Dun & Bradstreet. In July 1993. In March 2001 Satyam became first ISO 9001:2000 Company in the world as certified by BVQI. In November 1998. Canada. Satyam Infoway is the first Indian Internet company to be listed on NASDAQ.A significant break through factor in IT industry development was by Y2K. the first of its kind outside India. In May 2001 Satyam was listed on New York Stock Exchange. In February 2000 Satyam was declared one of '100 Most Pioneering Technology Companies' by World Economic Forum. 5 . In May 1997. a leading Data Warehousing and Business Intelligence solutions provider. Satyam Infoway was incorporated. In the same year in August. Indians were already gained expertise in converting mainframes and DOS PC’s into UNIX platform. out sourcing and diversified itself to hidden depths of IT industry to become a global hub for software and IT enabled services. Satyam was awarded ISO 9001 Certification in March 1995. DVS Raju. Satyam became one of the first companies to enter Indian Internet service market with the launch of Satyam Infoway's ISP Service. Satyam Computers was recognized as a Public Limited Company. Y2K created a battle ground for Indian software professionals and which prepared them to compete and show their talent globally. Satyam announced business continuity center in Singapore.

said Thursday that they had registered their interest in acquiring a majority stake in ailing Satyam Computer Services. analysts said.    Declared one of '100 Most Pioneering Technology Companies' by World Economic Forum. which has British Telecommunications as a key client and investor. Executives at both companies said they would not comment on market speculation. said in a filing to the Bombay Stock Exchange on Thursday that it will decide on other steps after it receives a RFP (request for proposal) and other information in connection with its bid. they will receive a RFP from the company. 6 . A Satyam spokeswoman said that “information on the number and names of investors registering interest would not be available immediately. and asked to submit a detailed expression of interest by Friday. Hewlett-Packard and IBM have not registered interest in a stake in Satyam. and Tech Mahindra. A stake in Satyam is likely to be interesting to small and medium-size Indian outsourcers looking to have access to Satyam's customers. B. Davos in the year 2000. After they register their interest online. Tech Mahindra. The company had earlier told a local TV channel that it may not bid if the full financial information on Satyam is not made available. a mid-size Indian outsourcer. said in January that the business inflated profits for years. The company accounts are being revised. That move is likely to have deterred some potential investors. an Indian engineering and construction company with a small IT services business. they added. Ranked by the Brown-Wilson Group as the number two outsourcing vendor globally in the year 2006 Indian companies confirm bids for Satyam Larsen & Toubro (L&T). Ramalinga Raju. First ISO 9001:2000 Company in the world as certified by BVQI. Satyam said. Satyam said. and information on the company's financial and business will be provided to short-listed bidders only in the later stages of the bidding process. and have a large number of clients. Market and media reports had said that the two companies may consider bidding.” Satyam was plunged into a crisis after the company's founder. First organization in the world to launch Customer-Oriented Global Organization training. a stake in Satyam is not likely to be of interest. analysts said. For large Indian outsourcers and multinational companies like IBM and Capgemini that already run large Indian operations. according to sources close to the situation. Satyam's board is meeting Friday and some announcement on investor interest can be expected.

Accenture. Satyam. Tech Mahinda has leapfrogged into the top five rankings of India's multi-billion-dollar outsourcing industry and in theory at least. In the meantime. Problem is Satyam." Bob Olivier. to a $100 million seven-year deal. it will take some time for the two companies to develop detailed plans. upgraded its clients list with Satyam's customers. has lost 46 clients to tech rivals such as Wipro. whose multinational clients include Citigroup. State Farm Insurance and Australian telco Telstra. Satyam's VP. 7 when founder B. including two auditors from Price Waterhouse. Coca-Cola. Ramalinga Raju confessed to vastly inflating Satyam's earnings as part of a $1 billion fraud. Capgemini. including quarterly earnings reports. Those clients leaving Satyam include Emerson. On April 17. for an estimated $570 million. Global Marketing & Communications told CIOZone. Since Satyam has to restate accounts for nearly six years. IBM and Tata. Ford. Tech Mahinda got approval from India's Company Law Board (CLB) to acquire 31% of Satyam for $351 million. are currently facing charges of criminal conspiracy. Satyam was plunged into turmoil Jan. which grabbed Abu Dhabi Bank. the new owner must take stock of what exactly it got for its money. It will also make an offer on the open market to buy an additional 20% of Satyam at an unspecified future date. by December 31. GM. Balasubramanian said it would be allowed to file all required documents. the first phase of which is expected to occur early next week. cheating and forgery for allegedly stealing millions of dollars from the company. defecting employees and a major exodus of clients. Tech Mahinda is acquiring a company whose revenues and accounts are at best uncertain. Nestle and Cisco. CLB chairman S. Until then—assuming Satyam makes that deadline—Tech Mahinda may be flying blind when it comes to determining the fiscal status of its new acquisition. which signed on one of Satyam's prized customers. "We won't be in a position to discuss integration matters before the deal is consummated. The Economic Times reported. Even then. is facing enormous problems. In other words. and Cognizant which bagged GlaxoSmithKline. Among the rivals benefiting from Satyam's client defections: 3i Infotech. Raju and eight others. At this point Satyam is not yet prepared to discuss how it intends to deal with client losses and the other issues it's confronting. 7 . Moreover.Acquisition by Tech Mahindra Now that mid-sized outsourcer Tech Mahinda has acquired controlling interest in fraud-beset Satyam Computer Services. including class action lawsuits.

due to short term concerns.parasramindia. can be good bet for Long Term investors.The good news is that Tech Mahinda is owned by India's Mahindra & Mahindra Ltd and British Telecommunications. both of which have deep pockets.com/reports_pdf/TechM-M%20Satyam. They may well need them to ensure Tech Mahinda's Satyam purchase proves successful. Presently. Since the mid of 2010 every now and then we have been hearing about the merger of the two companies. the combined valuation of 2 companies is at steep discount. A friendly merger: Mahindra Satyam & Tech Mahindra Even after the acquisition has been done formally but the companies are still working as different entities from almost 2 years.pdf 8 . Bellow figures are from: http://www.

Presently. appears at steep discount on the basis of 9 .The merged entity will be India’s 4th largest IT services provider.

Both the scrip may under perform in short to mid term.243. Growth in business and margin expansion are likely to result in EPS growing many folds. Mexico. lower than even smaller companies. Risks:     The questions are still the same. the margins are low.html 10 .php/Outsourcing/The-Satyam-Acquisition-What-Tech-MahindaGot. will they fade out Satyam or Mahindra or they will keep both. the scrip may slide down sharply. Tech M has limited expertise. Reference http://www. 195 Crore (against assumption of Rs. Canada and now in South after the FIFA 2010 and Tech Mahindra have a firm hold in Europe.ciozone. margins can see explosive expansion and its margins can be in the same league as the top 3. then post merger Equity will be about Rs. The merged entity will have expertise in diverse areas of IT services and much wider global reach. The results would be out soon.3 Crore). Merger requires clearances from various institutions in India and US. Mergers often create issues with employees not adjusting well and attrition may be very high. Presently.com/index. If Tech M decides to extinguish its stake on merger. As Satyam has a good hold in US and other regions like. Presently. which may be lengthy procedure. however with the synergy derived from the merger. till the dust settles.The points to be noted:       Market Cap/Sales Ratio. we will have to wait and watch how the two big firms get together and how does it impact the market potential for them and for others. which itself raises the value per Share by about 20-25% based on current fundamentals. Tech Mahindra is facing margins pressures. as it is expanding to various Geographies & Satyam is coming out of its tough phase. let it be financial. Probability of Jackpot: We assume that Merger will in ratio of 1 Tech M for Every 10 held in Mahindra Satyam and Promoters stake to remain as treasury shares. If Satyam is unable to turnaround to stronger performance. when will these company merge? Is it going to be a friendly merger? What will be the brand positioning strategy for them. Both the markets are fruitful but the companies individually but is it going to be fruitful after the merger. Presently. mainly of Telecom domain and Mahindra Satyam is coming out of its tough phase. branding or organizational structure issues.

11 .com/reports_pdf/TechM-M%20Satyam.http://sadhiqali.blogspot.pdf .allvoices.itworld.com/contributed-news/2290138-special-report-the-satyam-scandal-offshoreinmates http://www.com/2008/03/history-of-indian-it-industry.html http://www.com/business/64148/indian-companies-confirm-bids-satyam http://www.parasramindia.