Bangalore / New Delhi: In an industry where takeovers of captive technology and back-office service units of large US and European companies is increasingly becoming a common practice as a means to acquire new business, this week’s announcement by Tech Mahindra Ltd that it was paying Rs440 crore in a contract with a British customer stood out for its unusual structure.
Aiming for stability: CEO of Tech Mahindra Vineet Nayyar.
Tech Mahindra, the sixth largest software services firm in India, said on Monday that the payment was being made as part of promised savings in the contract with the unnamed customer, which many analysts think is BT Group Plc. (formerly British Telecom), also a significant minority shareholder in the Indian vendor.
The payment does not involve any asset transfer — of facilities or people — Tech Mahindra’s president for international operations C.P. Gurnani said, declining further detail.
This is the second such contract, which one analyst called ‘sole-sourcing’, where Tech Mahindra has made an upfront payment to its client. In the March quarter of fiscal 2007, it had made an upfront payment of Rs525 crore to BT, its largest client, in a $1 billion (Rs4,320 crore today) deal.
The latest contract could be announced in 7-10 days, according to a person with knowledge of the deal negotiations. “The upfront savings payment is unusual as they are so many unknown things involved,” this person said, referring to variables such as people and hardware costs.
Sabyasachi Satpathy, senior director at advisory firm neoIT, said he does not see the Tech Mahindra deal being replicated often. “We do not see this as a significant trend, but one will see these kinds of deals once in a while,” he said, adding that cash payments are normally common only in deals that involve transfer of assets or people.
In the Indian context, tech service providers have traditionally not been keen on taking over people and assets, but that is changing in recent years with firms such as Tata Consultancy Services Ltd (TCS) and Infosys Technologies Ltd signing a deal each.
Examples of such asset transfer deals include the $848 million acquisition of Pearl Group Ltd by TCS in 2005 and the $250 million, seven-year contract between Infosys and Royal Philips Electronics NV that involved an upfront payment of $28 million by the Indian entity for takeover of some 1,400 people and assets.
Tech Mahindra has told analysts that the payment is for 90 days exclusivity in contract negotiations and was unconditional, irrevocable and non-refundable. Vineet Nayyar, vice-chairman and managing director of Tech Mahindra, in a post-earnings call with analysts, said the positives of such contract was the certainty of the deal that will continue for multiple years, bringing down selling costs while boosting revenue growth.
“Such deals bring a lot of stability to our efforts and...instead of running around, looking at different things, we (focus) on a large contract and try to see how we can make it beneficial for the client and ourselves,” Nayyar said.
Research firm Infinity.com Financial Services Ltd said the Rs440 crore advance payment would be shared among a consortium partner. It is “a sunk cost and the consortium partner would pay (Tech Mahindra) its share of the one-time payment once the contract is finalized. Hence, there would be a write-back for that amount,” the Mumbai firm’s tech analyst Ruchir Desai wrote in a report on Wednesday. The firm has a ‘hold’ rating on the stock.