Bangalore / Hyderabad: In a move Mahindra Group vice-chairman Anand Mahindra termed a “game changer”, Tech Mahindra emerged the highest bidder for Satyam.
If it goes through, the deal will give Tech Mahindra a seat at the high table of the Indian IT services business. It will also mark the end of the uncertainty surrounding Satyam, though the firm’s legal and financial troubles are far from over.
Winning smile: Tech Mahindra chairman Anand Mahindra. AP
Tech Mahindra, which provides telecom software services, made the bid through subsidiary Venturbay Consultants Pvt. Ltd and will likely spend a total of Rs2,889 crore to acquire a 51% stake in the fraud-hit Satyam. Analysts say that the company may have to immediately invest Rs1,000 crore in Satyam for operating expenses. The deal needs to be approved by the Company Law Board (CLB), the government arm that oversees the functioning of companies.
A Mahindra Group executive said money wouldn’t be a problem. “Tech Mahindra has Rs700 crore of cash available and then we have hard under-writing for the remaining amount. So, we can arrange it,” said Bharat Doshi, the group’s chief financial officer.
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Tech Mahindra’s bid of Rs58 a share was at least Rs12 more than the next highest bid. “The best runner runs the race without looking behind. We have bid Rs58 after considering all the liabilities,” said Mahindra, one of India’s best-known chief executives, who promised to spend time meeting important customers of Satyam.
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Tech Mahindra’s emergence as the highest bidder for Satyam comes around 100 days after the biggest corporate fraud in India’s history. On 7 January, Satyam’s founder B. Ramalinga Raju disclosed that he had, over the years, fudged the company’s books to the tune of at least Rs7,136 crore. Raju and several executives of Satyam and two executives of Price Waterhouse, the company’s auditors, have been charged with fraud and are in jail. The board of Satyam was dissolved by the government days after Raju’s confession and a new board appointed in its stead. The effort to sell Satyam was initiated by the new board.
Tech Mahindra’s bid topped engineering firm Larsen and Toubro Ltd’s (L&T) Rs45.90 a share and private equity (PE) firm WL Ross and Co.’s Rs20 a share. US-based software firm Cognizant Technology Solutions withdrew from the race late on Sunday.
Read full coverage of Satyam fiasco
Satyam is expected to apply to CLB for permission to go ahead with the deal, the board’s chairman S. Balasubramanian said. The board “will take 24 hours to approve it”, he added.
Tech Mahindra, a publicly traded firm that is a joint venture between automobile firm Mahindra and Mahindra Ltd and BT Group Plc. (it owns 31% of the company), will then be given management control of Satyam after it deposits Rs1,756 crore with the company. Tech Mahindra will then have to make an open offer to acquire shares adding up to a further 20% stake in Satyam from the company’s public shareholders. If it isn’t successful in this, Satyam will issue it fresh shares to make sure it ends up with a stake of 51%.
People familiar with the matter say that Tech Mahindra has received a commitment of Rs1,500 crore from a clutch of non-banking financial companies, mutual funds and insurance companies. The remaining Rs700 crore will be raised through a short-term loan by Indian banks, they added, asking not to be identified. This loan will be repaid from the money that will be raised from PE investors, a banker familiar with the matter said, asking not to be identified.
Reuters reported that Tech Mahindra plans to raise Rs600 crore through sale of bonds to finance its Satyam buy, citing three unidentified people with knowledge of the deal.
Tech Mahindra’s chief executive Vineet Nayyar said legal liabilities of Satyam, including a case by Upaid Systems Ltd (a former Satyam client, it is locked in a dispute involving intellectual property rights and business losses with Satyam) and class action suits in connection with the accounting scandal, were considered and factored into the valuation of Satyam while arriving at the bid price of Rs58 per share. He declined to disclose his company’s estimate of the extent of Satyam’s financial liabilities from legal issues in the US.
“The legal liabilities against Satyam are estimated at $200 million. In the event of these liabilities materializing, Tech Mahindra may require further debt financing, putting more pressure on an already leveraged balance sheet,” Religare Hichens Harrison, the London-based broking arm of brokerage Religare Enterprises Ltd, said in a research note on Monday.
“We took a lot of scenarios into account and we’ve taken a very calculated risk in making this bid,” Mahindra said.
Making it work
Analysts see synergies between Satyam and Tech Mahindra. While Tech Mahindra largely works with telecom firms and gets 60% of its revenue from BT and 75% of its revenue from Europe, Satyam serves customers across businesses, including automotive. It also helps companies implement their business software and serves companies across North America and Asia.
Still, analysts say that the ongoing loss of business at Satyam could present a problem. Tech Mahindra has estimated Satyam’s revenue to fall to $1.3 billion (Rs6,500 crore), the company said on Monday.
“First priority should be ensure that there is no further attrition, either on the clients side or on the employees side,” said Anil Advani, head of research at SBICAP Securities Ltd.
It wasn’t immediately clear whether Tech Mahindra would retain Satyam’s new board and the brand name.
“I don’t think Satyam as a brand will exist in the long run. But re-branding and marketing the new brand can be a challenging task, especially in the current tough market condition,” said Diptarup Chakraborti, principal research analyst with consulting firm Gartner.
Satyam’s chairman Kiran Karnik said it was up to the new investor to decide whether to retain the brand.
The deal would pose financial and operational challenges for Tech Mahindra, said C.S. Chandramouli, director (advisory services) at outsourcing advisory firm Zinnov Management Consulting Pvt. Ltd.
Shares of Satyam that opened at Rs49.80 each on the Bombay Stock Exchange (BSE) on Monday, hit an intraday high of Rs55 around 11am, but closed at Rs48.85, gaining 3.6% over the last close.
On 6 January, the day before Raju disclosed the scam, Satyam shares were trading at Rs179. Since then, the lowest the company’s shares fell to was on 15 January, when it closed at Rs20 on BSE.
Shares of Tech Mahindra gained 12.3%, or Rs39.40, on BSE to close at Rs359.45 on Monday. The stock hit an intraday high of Rs400, a gain of 25%. The exchange’s benchmark index, the Sensex, gained 1.5% to end at 10,967.22.
Meanwhile, a senior executive at L&T, who was involved in the bid for Satyam, said: “It did not make any sense for us to bid for more than Rs45.90 with our cost of acquisition of 12% at Rs80 a share from the open market.”
L&T holds a 12% stake in Satyam acquired at an average price of Rs80 a share. It bought 4% in Satyam from the open market at Rs170 a share and the remaining 8% at Rs30 a share.
Tech Mahindra + Satyam
NO CLIENT OVERLAP: Deal allows Tech Mahindra Ltd to reduce the dependance on telecom clients. Some 60% of its revenues come from BT Group Plc.Satyam Computer Services Ltd’s expertise lies in the auto industry. It also serves clients such as GE, Sony and Nestle.
REVENUES: Revenues at Tech Mahindra (projected revenue for fiscal 2009 is close to $1 billion or Rs5,000 crore today) will grow at least 2.5 times with the addition of Satyam’s estimated $1.7 billion annual revenue, pitchforking the entity into a top-tier Indian tech outsourcer.
RESOURCE RATIONALIZATION: With Satyam’s 48,000 employees (by official count) joining its 25,000-strong workforce, Tech Mahindra has the opportunity to rationalize shared functions such as accounting, human resources and other support functions.
GEOGRAPHIES: Tech Mahindra gets a disproportionate amount of its revenue from the UK. With Satyam, that footprint expands into North American and Asian markets.
BORROWINGS: At the end of the December quarter, Tech Mahindra had $110 million in cash and cash equivalents. Even if that kitty expanded by $25-30 million in the March quarter, the acquirer will have to borrow or raise capital to fund the near-$600 million deal.
LEGAL TROUBLES: Estimating liabilities at Satyam—be it from Upaid Systems Ltd, a former client in the UK, or class action litigants in the US—is very difficult, making the deal a leap of faith for Tech Mahindra
PROFITABILITY: The financial accounts at Satyam are yet to be restated and the firm is likely to be poorer than public filings earlier. Question is by how much?
MANAGEMENT BANDWIDTH: While Tech Mahindra has executed well in the past, the Satyam takeover takes it into areas it has little expertise in. It may find its senior management stretched unless it manages to retain key, senior executives at Satyam Computer.
What’s next on agenda
• Satyam board may seek CLB approval in a day or two for sale to Tech Mahindra, which has emerged as the highest bidder
• Tech Mahindra has to deposit the amount by 21 April for the 31% stake before it can take control
• The Mahindra Group firm will have to go for an open offer for the additional 20% under Indian takeover rules. In case the open offer fails, preferential allotment would be made to the new owners
• Tech Mahindra will have to decide whether it wants to retain the tarnished Satyam name or merge the company with itself
• Possible reconstitution of the fraud-hit company’s board
• Role of government-nominated directors on Satyam board may be examined
• Tech Mahindra would reach out to Satyam’s customers to restore confidence
Mint’s Baiju Kalesh and Satish John in Mumbai and Sangeeta Singh in New Delhi, and Reuters and Bloomberg also contributed to this story.
Graphics by Sandeep Bhatnagar/Mint