The bid of Rs58 per share by Tech Mahindra Ltd for Satyam Computer Services Ltd seems to be based on a rather rosy view of how things will turn out after it takes over the fraud-hit company.
The bid values Satyam at Rs5,665 crore based on its expanded equity base. The two other bidders in the fray had valued the company at $898 million (around Rs4,481 crore) and $391 million.
The company has estimated Satyam’s annual revenues at around $1.3 billion. This is half the expected revenue of $2.6 billion before the fraud was revealed. But experts say that Satyam’s clients will continue to desert the company and that revenues will fall further.
Moreover, Tech Mahindra has an image of being a niche player in telecom. This may cause clients from other industries to look for software services vendors that have worked on solutions for the same sector.
Sudin Apte, senior analyst at Forrester Research Inc., told business news channel CNBC-TV18 that Satyam’s revenues would have stabilized at $1.2 billion if a diversified firm such as Cognizant Technology Solutions Corp. had taken over Satyam. With Tech Mahindra at the helm, he expects revenues to fall to $700-800 million.
The company has said that Satyam’s operating margin is currently around 3%, but expects it to improve considerably based on the information on billing rates and so on, and its own experience in running a software services firm. Tech Mahindra has an operating margin of about 27%. While this looks possible, it would take time and would involve aggressive cost cuts. Then, of course, there’s the uncertainty relating to the legal cases against Satyam.
Tech Mahindra is also stretching itself considerably to finance the deal. Of the total requirement of Rs2,900 crore, it has cash accruals worth Rs700 crore, while the rest will be financed through debt. Coupled with the uncertainties surrounding Satyam’s future, this makes it a leap of faith as far as Tech Mahindra goes.
Of course, things may well turn out fine under Tech Mahindra’s management and the investment may prove to be fruitful, but the risks are high. The company’s stretched finances will also hamper its ability to bid for large projects of BT Group Plc.
In the past two years, the company has twice paid an exclusivity fee of about $100 million to ensure that it received a large transformation contract. These two payments had wiped out its cash generation in fiscal years 2006-07 and 2007-08. In fiscal 2009, the payment for Satyam will wipe out its cash balance.
From a Satyam shareholder’s point of view, it seems best to exit at current levels, given the uncertainties. For the company’s largest shareholder, Larsen and Toubro Ltd, an exit at current levels would result in a loss of about Rs270 crore.
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