Bangalore: Larsen & Toubro is seen as the front-runner to acquire fraud-tainted outsourcer Satyam Computer Services Ltd but a potential purchase could bring more pain than gain.
Not only will the acquisition be a tricky one due to uncertainty about Satyam’s accounts and potential legal liabilities from US lawsuits but also it would distract Larsen from its main engineering and construction business.
And at a time the slowing economy is hurting Larsen, the engineering conglomerate would be better off using the acquisition cash to retire debt and focus on its core business, some investors and analysts feel.
Larsen, which had cash and cash equivalents of $920 million at the end of 2008, holds a 12% stake in Satyam.
It is widely believed to be one of the preliminary bidders for the troubled firm whose market value has plunged to $550 million from $7 billion last May. Larsen has not commented publicly on its interest.
“We believe the acquisition could potentially be an unwelcome distraction despite damage capped at 10% of market cap,” UBS analysts Suhas Harinarayanan and Pankaj Sharma wrote in a report on Thursday.
“The cash could have been used to lower debt or investing in core business,” they said.
Satyam has been struggling since founder and chairman Ramalinga Raju shocked investors in January, saying profits had been overstated for years and assets falsified. Raju is being held in jail.
IT services firm Tech Mahindra and diversified Spice Group are among the suitors for Satyam. Local media has reported that IBM is also among the bidders, but a source told Reuters on Thursday the US firm was not in the race.
Analysts have said Satyam looks attractive because of its long list of marquee clients, including General Electric and Qantas Airways, and due to the plunge in its market value.
However, bidders face a tough job in valuing the company due to uncertainty about its accounts and legal liabilities arising from the lawsuits filed in the United States by its shareholders.
Citigroup said in a report last week it would be difficult to quantify the value of Larsen’s stake in Satyam post a potential win given a lack of clarity on its financials, business continuity, client losses and liabilities.
If Larsen does not bid for Satyam and repays about Rs4,000 crore ($790 million) of excess debt on the books, Citi said it believed the engineering company’s consolidated earnings per share would go up by more than 6%.
Larsen has a small software business unit, L&T Infotech, and hopes Satyam could provide the springboard to expand globally but potential risks abound, analysts said.
“They have IT business, but it’s not their core competency,” said RK Gupta, managing director at Taurus Mutual Fund, which holds Larsen shares in its portfolio. “If they take over Satyam’s liabilities with the acquisition, that would be suicidal.”
If Larsen succeeded in acquiring Satyam, it would be seen as negative in the short term for the stock, Gupta added.
Shares in Larsen, which has a market value of $7.7 billion, closed up 2.8% at Rs680 on Friday. The stock is down 12% so far this year.