New Delhi/Mumbai: With three acquisitions and a couple of international deals in 2012 that give it additional scale, revenue and momentum, the Tech Mahindra-Mahindra Satyam combine is attempting to regain the glory that Satyam Computer Services Ltd (rebranded Mahindra Satyam) once enjoyed.
On Monday, Tech Mahindra Ltd acquired a 51% stake in Bharti Enterprises-controlled value-added services (VAS) provider Comviva Technologies Ltd for Rs.260 crore, in a bid to shore up its offerings in the mobility space as telecom revenues get a data bias as opposed to just voice.
Satyam was India’s fourth largest information technology (IT) services company till it almost collapsed after founder B. Ramalinga Raju in January 2009 admitted to fraud. Tech Mahindra, the software unit of conglomerate Mahindra and Mahindra Ltd, took control in April 2009 after winning a government-managed auction. The merger of Tech Mahindra with Satyam is expected to be completed soon.
On 24 August, at an analyst meeting in Pune, the company said it was targeting $5 billion, Rs.27,000 crore today, (combined) revenue by 2015.
“Three years after its acquisition, Mahindra Satyam has covered a lot of ground. The company has achieved stability and reasonable growth. Clearly, the company has managed to improve its brand equity, and now they (Tech Mahindra-Mahindra Satyam) want to build scale and revenue,” said Sudin Apte, chief executive officer and research director of Offshore Insights.
With revenue of Rs.400 crore, the newly christened Mahindra Comviva is expected to give Tech Mahindra a foothold in the mobility products space, given that nearly 47% of the revenue of Tech Mahindra and Mahindra Satyam comes from the telecom space.
By March 2013, the combined mobility practice of the group, which will include revenue of Tech Mahindra, Mahindra Satyam and Comviva along with CanvasM Technologies Ltd (another group company) should be around Rs.1,000 crore, said C.P. Gurnani, managing director of Tech Mahindra.
On 4 September, Tech Mahindra had announced the acquisition of a 100% stake in Hutchison Global Services Pvt. Ltd (HGS) for $87.1 million, payable upfront. HGS provides customer life cycle operations to clients in the UK, Ireland and Australia, and has an associate base of over 11,500 employees.
The clients of HGS have committed to sourcing services worth $845 million over a five-year period, and have agreed to HGS being their exclusive provider of certain agreed services in India. “This acquisition is in line with our growth plans and is a logical next step in extending our relationship with Hutchison. We are committed to this opportunity and excited about the possibilities this acquisition opens up,” Vineet Nayyar, executive vice-chairman of Tech Mahindra, said at the time.
In February, Mahindra Satyam acquired a minority stake in Dion Global Solutions Ltd for Rs.35 crore by way of fresh equity shares. The funds will be used to enhance Dion Global’s offerings and geographic reach.
In fiscal 2012, Tech Mahindra acquired the 19.9% stake of Motorola Cyprus in mobile VAS company CanvasM, which was set up as a joint venture between Tech Mahindra and Motorola in 2006. Mahindra Satyam acquired business-process outsourcing (BPO) firm vCustomer’s international operations last fiscal for $27 million in a bid to shore up its BPO operations.
“The recent string of acquisitions (by both Tech Mahindra and Infosys Ltd), with significant ticket prices, reflects the reliance on acquisition as a strategy to build revenue streams and buying future growth. Given that there is a limited availability of attractive acquisition targets, there is a good possibility that these transactions will propel other industry leading players to join the arms race and do acquisitions of their own,” said Alok Shende, founder and principal analyst of Ascentius Consulting.
The combine has also signed separate deals that are expected to boost revenue.
For instance, on 5 September, Royal KPN NV and Tech Mahindra announced a deal under which KPN expects to make savings of at least €200 million (Rs.1,416 today) over a five-year period. On 28 August, Mahindra Satyam announced a partnership with IFS, a global enterprise applications company, for joint sales and marketing activities around the IFS Applications software suite as well as staff training.
A technology consultant, who did not want to be named due to client confidentiality issues, said Tech Mahindra’s telecom business was comparable to even Tata Consultancy Services Ltd’s (TCS’s) telecom vertical, “so I don’t think they are concerned with the numbers game here”.
“They are trying to get to a space where their end-to-end portfolio is geared up towards the telecom space, which explains the Hutch BPO acquisition and the Comviva deal. Till now, their offerings could have been driven by what some of their large customers such as BT wanted out of them, but since they are free now and are competing in the broad market, they can build a portfolio of services which are not just market competitive, but also leading,” he added.
On 31 August, UK-based global company BT Group Plc sold shares worth Rs.1,395 crore, accounting for a 14.1% stake in Tech Mahindra, pruning its holding in the firm to 9.1%.
Ganesh Natarajan, vice-chairman and chief executive officer of Zensar Technologies Ltd, believes the Tech Mahindra-Mahindra Satyam combine is trying to become a tier I company. “There are two ways to achieve the goal and there is nothing wrong with their strategy to achieve scale inorganically, except that they have to be careful with the integration of so many acquisitions as there could be cultural issues involved,” he said.
Getting into the top tier, however, will be a tough act for the combine, said analysts, especially given that the revenue gap between the combine and its largest competitors is wide.
While India’s largest IT services company, TCS, posted revenue of around $10.24 billion for the year ended 31 March, Infosys’s revenue stood at $7.06 billion for the same period. The IT services business of Wipro Ltd posted a revenue of $6.12 billion, while HCL Technologies Ltd’s revenue stood at $4.2 billion and Cognizant Technology Solutions Ltd (listed on Nasdaq) posted $6.12 billion revenue in the year to 31 December.
In contrast, the revenue of the Tech Mahindra-Mahindra Satyam combine was $2.49 billion in the year ended 31 March.
“Even the 2015 goal (of achieving $5 billion) requires a 26% CAGR (compounded annual growth rate) over 2012. I’m not sure if it’s realistic,” said Apte of Offshore Insights.
Besides, rivals are also not sitting still. The Indian IT services sector finally appears to be waking up from hibernation, induced by turmoil in its main markets—the UK and the US—with a string of acquisitions and deals this year.
On 10 September, India’s second largest software exporter Infosys acquired Lodestone for $350 million in a billion-dollar consulting push, as it aims to increase revenue from European customers and widen its lead over rivals such as Cognizant.
With $3.7 billion in cash at the end of the June quarter, Infosys was consistently under pressure over the past few quarters to regain double-digit growth rates and fend off aggressive rivals.
On Monday, Tech Mahindra lost 0.69% to close at Rs.903.45 on BSE, while the BSE IT index lost 3.18% to end at 6,006.28 points, even as the benchmark Sensex index rose 0.42% to close at 18,542.31 points. Satyam lost 1.24% to close at Rs.103.75 per share.
From the beginning of the year, Satyam has gained 59.86%, while Tech Mahindra has risen 57.73%, even as the benchmark Sensex index gained 19.98% and the BSE IT index rose by a marginal 4.42%.
Ashwin Ramarathinam in Mumbai contributed to this story.