Will Big Blue buy Satyam?

Will Big Blue buy Satyam?

Bangalore: Stories of International Business Machines Corp.’s (IBM) interest in Satyam Computer Services Ltd were the stuff of which urban legends are made—and this was long before Satyam founder B. Ramalinga Raju shocked the world by confessing that he had, over the years, fudged the company’s books to the tune of at least Rs7,136 crore.

For the record, both companies have always denied these stories.

With Satyam’s new government-appointed board having started the process of selling a controlling stake in the company, these rumours have resurfaced—and in strength. Big Blue, as IBM is known, is said to have entered the race to acquire Satyam through a New York-based legal firm.

IBM itself hasn’t commented on its interest in Satyam. Nor has Satyam divulged the identity of all entities in the race. Software firm Tech Mahindra Ltd and engineering company Larsen and Toubro Ltd have publicly announced that they are interested in acquiring Satyam. iGate Corp. and conglomerate Hinduja Group decided to drop out of the race. And the B.K. Modi-controlled Spice group has said it is “temporarily out of the race".

Kiran Karnik, chairman of Satyam, defends the move not to disclose additional names, if any, who have expressed interest in buying the firm. “All I can say is that we are following proper procedure as required."

A spokesperson for IBM said the company had no comments to offer.

The last significant acquisition made by IBM in India was of back-office services firm Daksh eServices in November 2004 for $170 million (Rs867 crore today). IBM has also grown its operations in India from around 5,000 people in 2002 to an estimated 80,000 people now.

Two former executives, who have held senior positions in IBM’s Indian operations, independently admitted that the company had indeed closely examined Satyam for a possible acquisition, but walked away for a variety of reasons. Both executives spoke to Mint on condition of anonymity.

Some analysts say there are good reasons for IBM to want to acquire Satyam. One said such an acquisition could help Big Blue become a leader in the business of helping companies use business software. “If IBM does acquire Satyam, it may become the global leader in SAP implementation. Already they have a very large practice, but with Satyam, their lead could become unassailable," said Karthik Ananth, engagement manager at Zinnov Management Consulting Pvt. Ltd, an outsourcing and offshore advisory. SAP is a business software made by the eponymous German firm, and companies using such software usually need help in using it.

Another analyst said the acquisition could give IBM an entry into new business areas and help it tap new customers. Satyam, for instance, has a significant presence in businesses such as aerospace and defence equipment. Defence spending is unlikely to be affected by the recession.

Satyam also serves around seven of the world’s 10 largest auto firms and while the auto industry is in trouble, it is likely that it will need to use some amount of technology to reinvent itself. “Given that Satyam has a foot in the door with top auto companies, IBM can cross and upsell its other offerings. Sure, there may be overlapping clients, but Satyam does provide a good platform," said Sabyasachi Satpathy, director at Mindplex Consulting, which provide offshore advisory and consulting services.

The acquisition would also give IBM a presence across the software services spectrum, said Ananth. IBM, he added, offers high-end technology services, while Satyam is more in the application development space. “If they were to acquire Satyam, they could go with a complete portfolio of managed services."

A third analyst said that the acquisition could also help IBM tap customers in the so-called lower end of the market. “Given the current market conditions, information technology firms are chasing every single bit of revenue. IBM has steered clear of low-end work, which can still be profitable. A Satyam buy could help plug that gap," added this person, who asked not to be identified citing company policy.

But there are enough negatives associated with Satyam, say the analysts.

The exact nature of the financial impact on the firm of the class action lawsuits filed in the US is unknown; there is little clarity on the balance sheet of the company; and Satyam has already lost clients such as State Farm Insurance Co. and Telstra Corp. Ltd, while others, including National Australia Bank and US-based Selective Insurance Group Inc., have suspended their contracts with the firm.

Specifically, IBM could face flak on the home front if it went ahead with the acquisition, said the third analyst. “With IBM reported to have laid off 5,000 people in the US, it wouldn’t be a politically savvy move to suddenly acquire an Indian company with 40,000- odd employees. The mood is ugly and there might be political backlash," he added.

Still, much of such analysis is in the realm of the hypothetical, admitted Satpathy. “Right now, it is still a big if whether IBM will buy Satyam, though there are plenty of synergies possible."

Pros and cons of the deal

Why IBM might look at buying Satyam

*Enterprise resource planning practice: The SAPimplementation practice of Satyam Computer Services Ltdis one of the largest.

If the acquisition happens, IBM Corp.will become the global leader in SAP services. Satyam also has peripheral strengths in PeopleSoft, Ariba Inc.and i2 Technologies

* Aerospace/defence vertical : Satyam has the best expertise in this space compared with other tier I Indian information technology (IT) players, though global IT operates at the lower end of the services market in this vertical

* Auto: One of the strongest suites of Satyam. Seven of the top 10 global auto majors, including the likes of General Motors Corp. and Nissan Motor Co., are its clients. It has built considerable domain expertise in this area

* Domestic market focus: IBM is already the largest player in the Indian IT services market. It could potentially use Satyam resources and its understanding of the domestic market to carve a larger piece of the action

*Cross-selling services: In spite of all the negative press and loss of clients, Satyam still has an enviable roster of clients, including the likes of General Electric Co., Sony Corp.and Nestle SA. IBM can upsell some of their high-end technology services to existing clients, though their might be some overlap

Why it might steer away from the Indian firm

* Class action suits: Satyam is listed on the New York Stock Exchange. Nobody really knows what the impact of the class action suits in monetary terms is. IBM is known for its conservative and straighter-than-straight practices. It might balk at taking on something with limited clarity

* IBM has laid off close to 5,000 people just a week back in the US, according to ‘The Wall Street Journal’. If they were to acquire 40,000 additional people on top of the last disclosed IBM India’s numbers of 73,000, it will be a politically suicidal move as there might be a backlash in the US

* Given current market conditions, IBM can hire away talent from Satyam or any other player.

Why acquire the company?

* IBM operates in the mid- to top-end of the services market, whereas Satyam is mostly into low-end applications development and maintenance work, where margins are low

* Wouldn’t be a future-oriented buy as Satyam is losing employees, clients and goodwill